District Court Strikes Down Updates to CFPB’s Exam Manual Based on Expansive Interpretation of UDAAP

A district court in the Eastern District of Texas recently struck down updates to the CFPB’s Supervision and Examination Manual based on the CFPB’s expansive interpretation of “unfair, deceptive and abusive acts and practices” (UDAAP).  The court vacated those updates and enjoined the CFPB from conducting any examination, supervision, or enforcement action against any member of the trade associations based on them.

In March 2022, the CFPB had announced that it had expanded its interpretation of UDAAP to include discriminatory practices.  It had also published an updated exam manual based on this interpretation.  Under this manual, supervised companies are required to show their processes for assessing risk and discriminatory outcomes, amongst other things.  In September 2022, a group of trade associations sued the CFPB, seeking relief from the agency’s examination for discriminatory practices.  Specifically, the trade associations alleged that the updated manual should be vacated because the CFPB exceeded its statutory authority, the agency’s funding structure violated the Appropriation Clause, and the agency violated the Administrative Procedure Act.  The trade associations moved for summary judgment on all their claims, and the CFPB moved to dismiss the case for lack of jurisdiction, lack of standing, and improper venue, and, alternatively, moved for partial summary judgment.

The district court summarily granted the trade associations’ motion for summary judgment and denied the CFPB’s motion to dismiss and its alternative motion for partial summary judgment.  Applying the major-questions doctrine, the court held that the agency had exceeded its statutory authority under the Dodd-Frank Act.  The major-questions doctrine provides that an agency must have clear congressional authorization to exercise regulatory authority in areas of major economic and political significance.  The court held that regulation of the financial-services industry for discrimination had both major economic and political implications, and found that Congress had not conferred such sweeping authority, in part, based on the text and structure of the Dodd-Frank Act (Act).  The Act treated discrimination and unfairness as distinct concepts.  The court also found that the CFPB’s expansive definition had exceeded the scope of its regulatory authority clearly authorized by Congress.  While the CFPB has enforcement authority to regulate discriminatory practices pursuant to ECOA, the updated manual exceeded this scope of authority beyond credit transactions.

Applying Fifth Circuit precedent in Community Financial Services Association of America, Ltd. v. CFPB, the court found that the CFPB’s funding structure was unconstitutional because it violated the Appropriations Clause.  Earlier this year, the U.S. Supreme Court granted the CFPB’s certiorari petition requesting review of this Fifth Circuit decision.

The court also rejected the CFPB’s claim of sovereign immunity.  While noting a potential split within the Fifth Circuit on the issue of waiver of sovereign immunity, the court found, even under the more restrictive standard, which required a final agency action, that the updated manual satisfied this standard.  Under a 2014 Fifth Circuit case, an agency action is final if the action marks the consummation of an agency’s decision-making process, and it also determines rights or obligations, or serves as a ground for legal consequences.  The court determined that the manual met the first prong because it was not just a proposed or interim measure but actual examination criteria.  The court also found that it met the second prong because examiners were obligated to examine supervised companies under their new criteria, and a company’s failure to comply with the criteria could create legal consequences.  The court rejected the agency’s claim that the trade associations lacked standing, finding, in part, that the trade associations’ declarations had established that multiple supervised companies were members of each association and were expending money to comply with the updated manual.

WBK’s previous coverage of the CFPB’s announcement and updated manual is here, and its coverage of CFSA v. CFPB is here and here.

The case is Chamber of Commerce of United States v. CFPB, No. 6:22-cv-00381 (E.D. Tex. Sep. 8, 2023).