Kavanaugh’s skepticism of regulatory power seen as boon for banks

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Industry advocates are cautiously optimistic that Supreme Court nominee Brett Kavanaugh would side with banks on a range of legal questions relevant to the financial services industry, from the leadership of the Consumer Financial Protection Bureau to fair-lending requirements to preemption.

"Brett would approach a case as if someone was coming to talk to him, which is probably a good thing for the banking industry at the moment," said Keith Noreika, a partner at Simpson Thatcher & Bartlett and the former acting comptroller of the currency.

While his appointment would strengthen an already conservative majority on the court, industry observers see some specific views from his decisions that could benefit the industry.

Kavanaugh, a judge on the U.S. Court of Appeals for the D.C. Circuit, is perhaps best known for two recent business-related decisions: upholding the constitutionality of former President Barack Obama’s individual health insurance mandate, and ruling that the Consumer Financial Protection Bureau's single-director leadership structure is unconstitutional.

Kavanaugh's CFPB decision was overturned in January by the full D.C. Circuit. But if he were confirmed, and if questions about the CFPB's leadership structure ever came before the Supreme Court, Kavanaugh could be a key voice of skepticism about the agency, observers said.

The most notable thing Kavanaugh has done "is say the CFPB is an out-of-control agency," said J.W. Verret, an associate professor of banking and securities law at George Mason University.

In that decision, Kavanaugh wrote: "The CFPB's concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency."

But Noreika and others note his more general discomfort with granting deference to regulatory agencies on legal questions where the meaning of a law is vague. The court established such deference known as the "Chevron Doctrine" in a 1984 court case.

"The real issue is his skepticism of regulatory agencies and in some ways that's helpful to banks in this environment because there are a lot of regulations being put on them," Noreika said.

In his 2016 CFPB ruling, Kavanaugh stopped short of disbanding the CFPB outright, and instead opted to strike the "for cause" provision of the Dodd-Frank Act. That provision said the CFPB's director could be removed "for cause," effectively allowing the president to dismiss the head of the agency at will.

But there is some debate as to whether Kavanaugh would vote to eliminate the CFPB entirely if a case came before him on the Supreme Court.

"I think the frustration or growing pains with the CFPB was it was set up in a certain way, and that it does not have to go to Congress to get appropriations, and the head can't be fired," Noreika said.

The Senate Judiciary Committee will hold hearings on Kavanaugh's confirmation in early September with a floor vote expected by October.

"The odds are strongly in favor of Kavanaugh being confirmed, unless something comes up," said Mark Kende, director of the Drake Constitutional Law Center and a professor of constitutional law. "The fact that he ruled in favor of Obama on the Affordable Care Act case makes it harder for someone to portray him as an extremist on the right."

The Chevron doctrine is a critical issue for banks. Kavanaugh would join the first Supreme Court justice appointed by President Trump, Neil Gorsuch, in questioning judicial deference for agencies.

But overturning Chevron may be a double-edged sword for banks since both the CFPB and prudential regulators make judgments that in many ways protect banks' business models, lawyers said.

"Creditors want to know with specificity what they can and cannot do, and Chevron protects the specificity," said Jeff Naimon, a partner at Buckley Sandler. "Kavanaugh and Gorsuch are both skeptics of Chevron and [of] whether the standard in Chevron is right in determining whether agency actions are within their authority."

Noreika agreed.

"If the Chevron doctrine gets chipped away, it could be more difficult for banks," Noreika said. "I don't think ultimately Brett would want to get rid of Chevron. It would seem to be a long stretch to overrule Chevron, but he's not going to go looking for gaps in statutes."

If the Chevron doctrine is ultimately overturned, "the scale and scope of the federal regulatory authority would be narrowed," wrote Isaac Boltansky, director of policy research at Compass Point Research & Trading.

Noreika, who has known Kavanaugh for 20 years, said the D.C. Circuit Court of Appeals judge also may not be as skeptical of federal preemption as some might think, given that many conservatives typically side with states' rights.

As a former White House lawyer and solicitor general under President George W. Bush, Kavanaugh likely "has a less skeptical view of the supremacy clause," which asserts that federal laws take precedence over state law, Noreika said.

"He has a more federal orientation and that means there is a presumption in favor of preemption rather than against it, and it has been signed off at times unanimously by the Supreme Court," Noreika said.

As to the issue of "disparate impact," Kavanaugh may be skeptical of the legal theory that mortgage lenders can be found accountable for racial discrimination even if it is unintentional, lawyers said.

Justice Anthony Kennedy, who is retiring and whom Kavanaugh would be replacing, was the swing vote who sided with liberal judges in the 2015 Supreme Court case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, which reaffirmed the "disparate impact" theory.

"I don't think Kavanaugh is going to find disparate impact in the words of the Equal Credit Opportunity Act," said Naimon, referring to the 1974 law that bans discrimination in any credit transaction. "That's a positive for the industry because it means there is less liability for banks and financial firms, and more access to credit for consumers."

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Regulatory relief Regulatory reform Dodd-Frank Neil Gorsuch Brett Kavanaugh CFPB SCOTUS