Courts are new weapon of choice for banks looking to shift policy
WASHINGTON — Financial services companies and groups are increasingly willing to take the regulatory regime to court in an effort to fight back against enforcement orders and new initiatives — and so far, they appear to be succeeding.
Two more players joined the fray on Wednesday, with the Conference of State Bank Supervisors suing to stop the development of a new fintech charter while Ocwen Financial pushed back against the Consumer Financial Protection Bureau by challenging its constitutionality.
They are hardly alone. A pending lawsuit by the mortgage servicer PHH Corp. threatens CFPB Director Richard Cordray’s ability to keep his job, while MetLife has successfully used the courts to scrap its designation as a systemically important financial institution.
Other significant challenges include the American Bankers Association’s suit against Congress over its law limiting dividends paid to banks by the Federal Reserve Board and even a case by a small bank that establishes its right to sue over its exam rating.
“There’s an increased willingness to litigate,” said H. Rodgin Cohen, chairman of Sullivan & Cromwell, one of the country’s most high-profile banking lawyers. “It’s two factors. The consequences of what the agencies or Congress has done are so substantial … and there is a view that there is no other method to resolve this situation.”
The proliferation of major cases is a sea change from the way the banking industry has behaved in the past. Generally speaking, banks don’t sue their regulators.
“Bankers are reluctant to stick their heads up,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics. “They feel — with good reason — that they live or die with the goodwill of regulators.”
But that is changing, in part because of victories by PHH Corp. and MetLife.
“Success breeds courage,” Petrou said.
Moreover, there has long been a stigma associated with taking a regulator or rule to court, which appears to be going away.
“The more cases are brought, the less one worries about a stigma,” Cohen said.
The cases come at a time of increased attention to court challenges to the government more generally. The Trump administration has struggled to implement its immigration policies after courts have blocked some of the president’s executive orders.
At the heart of many of the financial cases is the question of what kind of deference is due to an agency in interpreting existing bank regulatory policy. Two legal precedents establish separate kinds of deference. Under the so-called Chevron doctrine, named after a Supreme Court case, courts will generally defer to the statutory interpretation by a government agency charged with implementing the statute, as long as the agency’s interpretation is sound. Another type of deference is for agencies that interpret their own previous rules.
The amount of deference afforded to regulators is the key issue in MetLife’s challenge to the Financial Stability Oversight Council, which is currently under appeal, and the CSBS’s challenge Wednesday to the Office of the Comptroller of the Currency.
But the Chevron doctrine did not help the FSOC.
“The issue of Chevron deference is a very big issue in the MetLife v. FSOC case because FSOC was applying its designation authority under Title I of Dodd-Frank. If you read [FSOC’s] designation decision, they were obviously saying they were applying the criteria from the statute as they interpreted it,” said Arthur Wilmarth, a law professor at George Washington University.
It also has not helped the CFPB in PHH’s case against the agency. A three-judge panel, in addition to finding the single-director structure of the bureau was unconstitutional, ruled that the CFPB had interpreted laws under its jurisdiction in improper ways. That case has now been appealed to an 11-judge panel.
There’s a growing sense that the agencies, and the CFPB in particular, have interpreted their mandates aggressively, which opens them up to more legal challenges.
“The CFPB pushed it as far as it could, like a court prosecutor would,” Petrou said. “That forces institutions in the regulatory and enforcement environment to fight back.”
The same argument has been made against the OCC, which is accused of overextending its legal authority to charter fintech firms. In its suit on Wednesday, state regulators said the OCC did not have the right to charter nonbanks.
“The OCC is taking a very aggressive view of its power,” said Brian Knight, senior research fellow at the Mercatus Center of George Mason University. “Everyone had gotten used to how the OCC and the states had interacted, but now the OCC is taking its authority a step further. The CSBS feels that it has to react.”
The Chevron defense itself may not last much longer. New Supreme Court Justice Neil Gorsuch has expressed open skepticism on the idea of deference to government agencies, while House Republican leaders have targeted Chevron as part of regulatory reform.
In recent cases, the agencies may well have been counting on the idea of deference to shield them from lawsuits. In the MetLife battle, the court found that FSOC had not properly substantiated its decision-making process or provided adequate justification for many of its actions. In the OCC’s case, some suggest the agency should have explicitly limited a fintech charter’s ability to preempt state usury laws to minimize conflict with state regulators.
John Beaty, a partner at Venable, added that “it’s certainly a debate right now on whether any deference should be given at all to regulatory agencies when they interpret their own statute.”
“What that becomes is the question of whether judges who see particular statutes on an occasional basis are better at interpreting a statute or whether they should recognize the familiarity to the statute that the regulator has,” he said.
The legal challenges have spread even to an area where regulators were thought to have more sway: exams. An appeals court ruled in January that the $41.4 million-asset Builders Bank in Chicago had the right to sue the Federal Deposit Insurance Corp. to overturn its Camels rating. That may spur other banks to follow suit and demonstrates that deference to government agencies — once thought unassailable — appears to have lessened.
“The Chevron doctrine is not absolute insulation,” Cohen said. “When an agency oversteps its bounds, the courts are willing to say so.”
The increase in critical court cases may also simply be a matter of timing. When the Dodd-Frank Act was enacted in 2010, it took time for regulators to write rules implementing those changes. Challenges to those rules are now just coming to a head.
“We’re at the point of the first mature cycle of really thinking through whether the CFPB is a good idea,” Knight said. “That seed was planted when the CFPB was created. In the MetLife case, Dodd-Frank created this whole new SIFI process. It’s now at the point where this unique model is being tested and litigated. Now is the time for pushback.”
Lalita Clozel contributed to this article.