What post-Chevron financial regulation will look like

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Last month the U.S. Supreme Court gave the financial industry an early Christmas present that radically changes the relationship between regulators and private industry. With the landmark Supreme Court decision in Loper Bright Enterprises v. Raimondo, overturning Chevron USA v. National Resources Defense Council, much of the rule making by the Federal Reserve Board, the SEC, HUD and other agencies is now open to attack.

The implications for the demise of Chevron deference are far reaching and profound. The ruling affects almost anything the federal government does – from health care, labor law, financial services regulation, tech and telecom to tax and tariffs. Any attempt by an agency to expand its authority without specific instruction from Congress is now subject to challenge and possible reversal.

"When we saw that Chief Justice John Roberts had written the majority opinion in the Supreme Court's 6-3 decision in the Loper Bright and Relentless cases we thought that surely the Chief would have added a subtle touch, a dash of nuance, or some qualifiers to his opinion to mitigate its impact," notes Jim Lucier of Capital Alpha Partners.

"Nope. It is a deep, broad, thorough, and total repeal of the Chevron doctrine – and one that scatters salt in the ruins of what is left, much as the Romans destroyed the city of Carthage."

Every federal regulation and operational rule that does not have specific support in the relevant statute is now subject to question. This includes the entire Basel Accord, which had never been endorsed by Congress. Basel, lest we forget, was created by the Federal Reserve in the 1970s and consists entirely of private understandings between the finance ministers in the Group of 10 nations. The Basel Accord has never been presented to the Senate for ratification. 

Moreover, banks and mortgage firms now face a completely changed relationship with their respective regulators. No longer can agencies hide behind a legal presumption of deference from the courts. With the end of the federal judiciary's forty-year-old practice of giving credence to agencies' reasonable interpretations of ambiguous federal laws, financial firms now have a level playing field when challenging agency actions.

So, for example, when the Federal Housing Finance Agency uses irrelevant laws as the basis for conducting prudential examinations of nonbank mortgage firms, the industry now has a powerful incentive to say "no." When the FHFA uses the basic issuer financial criteria as a basis for floating ersatz non-bank capital rules, the industry now has a very strong incentive to say "no" and threaten legal action.

The fact of the Loper decision means that the general counsel of every federal agency in Washington is now on the defensive. When mortgage companies are in discussions with regulators, the leverage now resides with the issuer. That is a big change. 

With the Consumer Financial Protection Bureau, just about every regulation issued by the CFPB is now subject to challenge and litigation. Monetary fines imposed by the CFPB may be challenged. Everything from the CFPB's new rules on mortgage servicing to limits on overdraft fees for banks to regulations on the use of consumer data by Google can be challenged and with a far greater likelihood of success than before the Supreme Court decision.

CFPB Director Rohit Chopra was slated to finalize a raft of new regulations in 2024, including rules cutting overdraft fees and allowing customers to share their banking data with third parties. With the USSC decision and also the prospect of President Donald Trump winning re-election in November, however, the CFPB is likely to be significantly curbed in 2025.

"While the demise of Chevron is important for all federal agency actions, the CFPB may face more consequences than many other agencies, given its aggressiveness in interpreting federal statutes and pushing the envelope with respect to its own authority," notes Ballard Spahr in a comment.  

Another example of the impact of the USSC decision is Ginnie Mae, where the agency has been attempting to impose "risk based capital requirements" on non-bank issuers. We noted in our previous comment ("Ginnie Mae risk-based capital rule is unworkable") that the agency is encountering difficulty with its proposal. But now government issuers can block the Ginnie Mae capital proposal, which has no statutory basis, in federal court. 

"Roberts' decision basically said that only the courts interpret the law, and that the only correct reading of a statute is the one that a court determines," notes Lucier. "There is no range of possibilities in which federal regulators get to choose the one that they prefer." 

As the full impact of the USSC decision in Loper Bright Enterprises v. Raimondo becomes better understood in the months ahead, banks and mortgage lenders will have an opportunity to roll back years of aggressive regulations by agencies such as the CFPB, HUD and the FHFA. Every action taken by every federal agency that is not backed by specific instruction from Congress can be attacked and voided in court. 

"This decision upends decades of administrative law precedence and will make it much easier to challenge agency regulations," writes the Mortgage Bankers Association. "Notably, such challenges to rules can come from industry groups as well as groups or individuals that believe certain rules may be too industry-friendly."

MBA continues: "This may also change the incentives and discourage administrative agencies from engaging in the costly and time-consuming process of writing notice-and-comment regulations – regulations that our industry sometimes relies on to make sense of poorly worded statutes."

At the end of the day, the biggest benefit to banks and lenders resulting from the action by the Supreme Court will be to prevent federal regulators from wasting the time of private companies needlessly. If you don't think an agency has a good legal basis for a rule or penalty, threaten to sue and see what happens. You may be very pleasantly surprised by the reaction.