NEW ORLEANS—America’s Credit Unions has joined several organizations to file an amicus brief with the Fifth Circuit Court of Appeals that supports a challenge to the CFPB’s 2022 update to its Exam Manual.
The American Bankers Association and Consumer Bankers Association were among those signing the brief.
The challenge states that the CFPB is exceeding its statutory authority by adding “discrimination” to the Exam Manuel as an unfair act or practice under the CFPB’s unfair, deceptive, or abusive acts or practices (UDAAP) authority. The brief states that court precedent interpreting the Administrative Procedure Act (APA)—and the distinction between substantive rules and general policy statements—applies to the CPFB’s update because it imposes such binding obligations, America’s Credit Unions explained.
“While guidance should normally be treated as non-binding, the 2022 Manual Update carries the force and effect of law for financial institutions that offer financial consumer products and services,” the brief reads. “And as a practical matter, regulated entities face immense pressure to comply with the Exam Manual due to the broad power the CFPB exerts over them, and given that state regulators leverage the Exam Manual on matters that overlap with federal law.”
The brief also notes the update does not identify which types of non-credit transactions will be the focus of regulatory concern and attention.
Disparate-Impact Testing
“It is not possible for financial institutions to conduct disparate-impact testing on every type of account transaction or review every non-lending policy,” the brief reads, including specific costs and obligations financial institutions have already taken in attempts to comply, including:
- Significant investment in expanding compliance and fair lending frameworks beyond non-lending products and services, which also includes discontinuing certain checking accounts out of an abundance of caution, and increasing the level of review of complaints for non-lending transactions
- Expanding the already burdensome and resource-intensive disparate impact analysis, despite a lack of complete and accurate demographic data (which is prohibited by other regulations) and a likely increase in false positives finding disparate impact
- Building and maintaining systems to securely store sensitive demographic data, plus additional procedures to validate, deliver, and refresh this data
The organizations also note the CFPB fails to provide guidance on how financial institutions should approach compliance with the Manual Update, nor does it acknowledge the challenges of monitoring and combatting disparate-impact liability.
“The CFPB has failed to even identify any protected classes or explain what legal test the agency will use to determine whether discrimination occurred, and the CFPB appears to have ignored the industry’s request for clarity on these and other critical points,” the brief reads. “Those subject to the UDAAP prohibition are forced to figure these things out for themselves—on pain of a supervisory or enforcement action if they guess wrong.”
In an earlier ruling, the U.S. District Court for the Eastern District of Texas granted the plaintiff’s motion for summary judgment and vacated the 2022 Exam Manual. In its September 2023 ruling, the lower court stated: "...[T]he court holds that the CFPB’s...March 2022 manual update is beyond...the agency’s statutory authority to regulate “unfair” acts or practices under the Dodd–Frank Act," ACU noted.