Texas federal court rules for ABA, trades in CFPB UDAAP manual litigation

CFPB Litigation
Chamber of Commerce of the United States of America v. Consumer Financial Protection Bureau
Date: Sept. 8, 2023

Issue: Whether CFPB’s revised exam manual expanding its Unfair, Deceptive or Abusive Acts or Practices (UDAAP) authority to include discrimination violates the Dodd-Frank Act and Administrative Procedure Act (APA).

Case Summary: Judge Campbell Barker of the Eastern District of Texas granted ABA and its co-plaintiffs’ motion for summary judgment in the lawsuit challenging CFPB’s update to the UDAAP portion of its Supervision and Examination Manual.

In March 2022, CFPB announced it considers discrimination to be a UDAAP and will begin examining for discrimination and whether companies are adequately “testing for” discrimination in their advertising, pricing, and other activities. The manual update directs examiners to use the agency’s UDAAP authority to access companies’ data, algorithms, operations, premises and personnel for evidence of “discrimination,” including “disproportionately adverse impacts on a discriminatory basis,” or evidence of insufficient internal monitoring for those outcomes.

On Sept. 28, 2022, ABA and its co-plaintiffs sued CFPB and Director Rohit Chopra in the Eastern District of Texas, urging the court vacate the manual update and enjoin CFPB from conducting any examinations or enforcement actions based on it. ABA argued the court should vacate the manual update under the APA because CFPB exceeded its UDAAP authority in the Dodd-Frank Act; the manual update is arbitrary and capricious because CFPB’s interpretation of “unfairness” contradicts the historical use and understanding of the term; and the manual update violates the APA’s notice-and-comment requirement because it is a legislative rule imposing new substantive obligations on regulated entities. Additionally, ABA urged the court to vacate the manual update under the Fifth Circuit’s decision in Community Financial Services Association of America Ltd. v. CFPB, which ruled CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. In response, CFPB filed a motion to dismiss, arguing the court lacked jurisdiction, ABA lacked associational standing and venue was improper.

Before addressing the merits, the court denied CFPB’s motion to dismiss. The court rejected CFPB’s argument that it lacks jurisdiction because the manual update is not a final agency action. The court reasoned that the manual update marked the consummation of CFPB’s decision-making process and adopted a new “legal position” on the breadth of the UDAAP prohibition. The court also rejected CFPB’s argument that ABA lacks associational standing, noting ABA’s declaration demonstrated its members are currently incurring compliance costs associated with the manual update. Finally, the court rejected CFPB’s argument that venue was improper, explaining plaintiff Longview Chamber of Commerce is a resident of the Eastern District of Texas and plausibly alleged standing.

The court also granted summary judgment to ABA on its Appropriations Clause under Community Financial. The court ruled CFPB’s expanded position in the UDAAP manual exceeds CFPB’s constitutional authority based on the Appropriations Clause violation. While noting CFPB preserved its argument that Community Financial was wrongly decided, the court ruled the Fifth Circuit’s decision controls in the Eastern District of Texas. Because Community Financial is pending before the Supreme Court, the court also decided the merits of ABA’s claims under the APA.

In granting summary judgment to ABA, the court ruled the manual update exceeds CFPB’s statutory authority under the Dodd-Frank Act in four ways. First, the court held that the major questions doctrine applies, which provides agency must point to clear congressional authorization for taking an action with major economic and political significance. The court found the manual update is a major question and exceeds CFPB’s statutory authority. The court concluded the choice whether CFPB has authority to enforce discrimination and disparate impact against any group it considers protected is a question of major economic and political significance. The court concluded Congress rarely authorizes disparate-impact liability, and when it does, it does so in narrow circumstances to avoid constitutional questions.

Second, the court found the Dodd–Frank Act treats discrimination and unfairness as distinct concepts. The court noted in the Dodd-Frank Act, Congress directs CFPB to exercise its authority to ensure that, with respect to financial products and services, “consumers are protected from unfair, deceptive or abusive acts and practices and from discrimination.” According to the court, Congress did not say “including discrimination” or “such as discrimination,” but used the word “and” to conjoin two distinct concepts—UDAAP and discrimination.

Third, the court emphasized Congress authorized CFPB to enforce the Equal Credit Opportunity Act, which explicitly prohibits “discrimination” and defines protected classes. The court reasoned that Congress knows how to add discrimination to CFPB’s regulatory portfolio when it intends to do so.

Fourth, the court emphasized the statutory definition of “unfairness” does not mention discrimination. The statute’s “unfairness” section instead refers to whether an act or practice will cause consumers substantial injury that they cannot avoid and is not outweighed by counter-vailing benefits to consumers or competition.

As to remedies, the court vacated the March 2022 revisions to the UDAAP manual and granted injunctive and declaratory relief to ABA members and its co-plaintiffs’ members. The court enjoined CFPB from pursuing any examination, supervision, or enforcement action against ABA members and its co-plaintiffs’ members based on CFPB’s perceived authority under Dodd-Frank act to investigate allegations of discrimination.

Bottom Line: On Sept. 11, 2023, CFPB indicated its reviewing its options for appeal, and noted on its website the updated language in the UDAAP manual is “no longer operative.”

Documents: Opinion and Order