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On September 8, a Texas federal judge ruled that the CFPB exceeded its authority by adopting a sweeping anti-discrimination policy last year. The CFPB adopted the policy in March 2022, via an update to its exam manual, stating that discrimination in any financial product is an “unfair” practice that can trigger liability under the federal prohibition against “unfair, deceptive or abusive acts or practices” or UDAAPs (we discussed this policy in previous posts here and here). The CFPB offered examples of practices that may be unfair because they are discriminatory, including offering one set of products or services to a certain customer demographic and a greater set of products or services to another customer demographic, providing inferior terms to one customer demographic as compared to another customer demographic, and engaging in targeted marketing or advertising in a discriminatory manner.

The court vacated the CFPB’s exam manual update and enjoined the CFPB from enforcing the policy with respect to members of the plaintiff trade organizations that challenged the policy, which includes, among others, the US Chamber of Commerce and Consumer Bankers Association. The judge ruled that Congress did not give the CFPB broad authority to look for discrimination beyond those areas specified in the statute. “The CFPB faces a high burden in arguing that Congress conferred a sweeping anti-discrimination authority without defining protected classes or defenses, without using the words ‘discrimination’ or ‘disparate impact,’ and while separately giving the agency authority to police ‘discrimination’ only in specific areas,” the judge wrote.

In making its ruling, the court applied the major questions doctrine, which 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 to the CFPB, in part based on the text and structure of the Dodd-Frank Act, which treated discrimination and unfairness as distinct and separate concepts. 

The court also followed the US 5th Circuit Court of Appeals decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, ruling that the exam manual was invalid because the CFPB is unconstitutionally funded. This issue will be coming before the US Supreme Court in its upcoming term, so the court opted to also consider the exam manual updates based on the major questions doctrine, so that there would be an alternative ground for providing relief to the plaintiffs in this case in the event that the Supreme Court reverses the 5th Circuit’s holding.

Putting It Into Practice:

The CFPB indicated on September 11, that it is considering its options for appeal, and stated on its website that the anti-discrimination language challenged by the plaintiffs is no longer operative. Nevertheless, despite the pending challenge to the CFPB’s constitutionality, the Bureau is continuing to issue rules and proceed with enforcement actions. Therefore, it would be prudent for financial services companies to carefully consider their examination management approach and discuss early on with counsel any exam requests that might be impacted by the court’s ruling.