On September 28th, 2022, several banking trade groups have sued the CFPB, claiming it has exceeded its authority with anti-discrimination enforcement. The litigation challenges the CFPB’s recent update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) section of the CFPB’s exam manual because it exceeds its statutory authority and violates the Administrative Procedure Act (APA) in three ways:
The Bureau is exceeding its statutory authority outlined in the Dodd-Frank Act;
The updated manual is “arbitrary” and “capricious”, and;
The APA’s procedural requirements were violated as it constitutes a legislative rule that failed to go through notice and comment.
The trade groups sued in federal court in Texas after CFPB Director Rohit Chopra has been forcing banks to submit to regular tests of how their treatment of customers may inadvertently disadvantage certain groups, including racial minorities, by expanding the application of a law that did not specifically include anti-discrimination protections. The CFPB has not used the normal process for writing and introducing new regulations to make the change. Instead, it simply updated an exam manual, which banks use to assess their compliance with the law. Mr. Chopra has also prohibited banks from publicly speaking on the CFPB’s action against them regarding the matter “without prior written permission of the director”.
The provision in the Dodd-Frank Act prevents banks from engaging in “unfair, deceptive or abusive acts or practices”. The CFPB added “discrimination” and “disparate impact” as categories to its regular exams of banks and other lenders. The trade groups claim that the law was not supposed to cover discrimination. Newly added categories are raising the costs of compliance by forcing banks to document in new ways, and are becoming costly for banks that need to pay for lawyers to deal with the CFPB coming after them with questions about their products.
It is unusual for Banks’ lobbying groups to sue regulators. The last lawsuit was in 2013, over another provision of Dodd-Frank, the Volcker Rule. The trade group dropped the lawsuit after regulators made the changes it was seeking.
The banks say that they have no issue with regulators enforcing existing anti-discrimination laws. However, making significant change to a rule simply by updating an exam manual deprived banks of information they needed to determine what kinds of behaviors would violate the rule.
What are your thoughts on the CFPB's recent actions? Contact Firstline at (831) 325-3369 or info@firstlinecompliance.com for questions or comments.