Deep Dive Episode 250 – Examining the CFPB’s Targeting of Discrimination in Consumer Finance Through UDAAP

Under the Biden Administration, Consumer Financial Protection Bureau Director Rohit Chopra has dramatically increased the substantive reach of the CFPB’s use of guidance documents and examination and supervision powers. This includes the articulation of a new standard of Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) that includes allegedly discriminatory practices. It also has announced it intends to use “dormant” powers from Dodd-Frank that would allow it to conduct supervisory exams on nonbanks or any fintech it believes is risky. Many critics argue that many of these acts should be conducted through notice and comment rule-making processes and point to similar efforts during the Obama Administration when similar extensive use of guidance was treated as equivalent to a rulemaking for purposes of the Congressional Review Act. A major lawsuit has also challenged this assertion of authority by the CFPB.

In this episode, experts discuss the specifics of the CFPB’s assertion of expansive authority in these areas, the use of supervision more generally in relation to rulemaking, and the lawsuit that has challenged these acts.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.

[Music and Narration]


Introduction:  Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.


On January 31, 2023, The Federalist Society’s Regulatory Transparency Project hosted a virtual event titled “Examining the CFPB’s Targeting of Discrimination in Consumer Finance Through UDAAP. The following is the audio from the event.


Colton Graub:  Good afternoon, and welcome to The Federalist Society’s Fourth Branch podcast for the Regulatory Transparency Project. My name is Colton Graub. I’m the Deputy Director of RTP. As always, please note that all expressions of opinion are those of the guest speakers on today’s webinar. If you’d like to learn more about each of our speakers and their work, you can visit, where we have their full bios. After opening remarks and discussion between our panelists, we will go to audience Q&A. So please be thinking of the questions you’d like to ask our speakers. 


This afternoon, we’re pleased to host a conversation discussing “CFPB’s Targeting of Discrimination in Consumer Finance Through UDAAP.” To discuss this topic, we’re pleased to welcome an expert panel of distinguished speakers. Todd Zywicki will be moderating the conversation. He is the George Mason University Foundation Professor of Law at George Mason University. Todd, I’ll pass it off to you to moderate the discussion.


Todd J. Zywicki:  Thank you, Colton, and thank you, everybody, for being here today. Our topic for today is entitled “Examining the CFPB’s Targeting of Discrimination in Consumer Finance Through UDAAP”—the Unfair Deceptive Acts and Practices—prong that was embodied in law through the Dodd-Frank Financial Reform Legislation about ten years ago.


But there are larger issues that are raised by this and by the questions of, the extent to which the CFPB and modern regulatory state, generally, can use a variety of different tools, such as enforcement, guidance, other forms of what Wayne Crews of the Competitive Enterprise Institute refers to as so-called “regulatory dark matter” that sort of fall in some netherworld between formal agency actions, like rulemaking and enforcement, and things that are just prudential in ways of helping to guide behavior and give predictability behavior by private parties, who are the regulated entities.


And that’s what we’re going to talk about today is both what is going on at CFPB, its expanded use, its aggressive use of various issues, like examination and supervision, as well as more general use of powers to try to, essentially, mold private behavior through relatively informal processes.


The CFPB is unusual—perhaps unique—among consumer protection agencies as we discuss in the Consumer Financial Protection Taskforce report that I chaired a couple years ago. The CFPB has five tools at its disposal. It has rulemaking. It has enforcement. It has supervision. It has research capabilities, and it has consumer education. And it is unique, in particular, in having a supervisory power. The Federal Trade Commission, for example, has no power of supervision. Most consumer protection agencies do not have powers of supervision. The CFPB does. The CFPB also has broad rulemaking authority that’s broader than most.


And during the Biden administration, under the leadership of Rohit Chopra, this use of supervision and these other regulatory dark matter ideas have been greatly expanded. And we’re going to talk about that today, both as it applies to the CFPB specifically, as well as the more general questions.


So we have two great people here to talk with us: Brian Johnson and Bryan Schneider. I’m going to refer to them as Brian J. and Bryan S. Bryan Johnson is a Managing Director in the Banking Supervision and Regulation Group at Patomak Global Partners. He has been there after working at Alston & Bird, and he works with Keith Noreika, who many Federalist Society people know there. Prior to that, he was the Deputy Director during the Trump administration with First Acting Director, Mick Mulvaney, and then Director, Kathy Kraninger, where he was the Deputy Director of the CFPB. And before that, he worked for many years on Capitol Hill with Jeb Hensarling and others on the House Financial Services Committee, where he was a staffer and particularly specialized in oversight and understanding the CFPB.


Our other guest today is Bryan Schneider. Bryan is a partner in Manatt, Phelps & Phillips where he is in the Chicago office. He is a member of the consumer financial services practice. Bryan moved to Manatt in August 2021 when he left the Bureau, where had been Associate Director for the Division of Supervision, Enforcement, and Fair Lending at the CFPB. And before that, he had many years as the Secretary of the Illinois Department of Financial and Professional Regulation under Governor Bruce Rauner. During that period, he was responsible with executing supervision and policy for the financial services industry in Illinois, where he did all the typical things, but also was a leader in creating Illinois’ Blockchain Initiative—various other modernizations to the regulatory process in Illinois. And it was after that experience that he came to the CFPB to take over as the head of the Supervision Division.


So what we’re going to do today is we’re going to first hear from Bryan Schneider—Bryan S.—who will talk to us generally about supervision, the normal logic of supervision, how supervision can be used and is being used at the CFPB. And then we’re going to turn to Brian Johnson to talk both about what the CFPB is doing, as well as litigation and some of the challenges associated with trying to restrain regulatory dark matter generally, as well as the ways it’s being used at the CFPB.


So, with that, I will turn it over to Bryan Schneider to kick us off. A reminder before I turn to Bryan, there is a Q&A function. If you want to send in a question, I will cue up all the questions. And after we hear from our speakers, I will give questions that you pose. Just put them in the Q&A function, and I will retrieve them. So, Bryan Schneider, the floor is yours.


Bryan Schneider:  Well, thank you very much, Todd. Thank you, everyone, for allowing me to have this opportunity to chat with you. I think, perhaps, the Bureau is unique in so many ways and different in so many ways. The fact that it has supervisory authority perhaps makes it a unique creature at the federal level in the sense that it is, I think, the only entity with supervisory powers that lacks a clear, defined safety and soundness responsibility.


It’s not the case, though, that federal financial regulators have not supervised for compliance with consumer protection laws because the credential regulators do that on a regular basis. I suppose it’s an interesting question. “Why might the Bureau have been given supervisory powers in addition to its enforcement powers?” 


I think the closest answer to that that I might be able to think of is there is significant reputational risk for entities that frequently fail to comply with their consumer protection obligations. And, to that extent, they need to be supervised as part of the regulatory apparatus to ensure that they remain safe and sound operators. And, of course, it was Dodd-Frank that simply divorced that. Smaller institutions less than $10 billion in assets continued to be supervised by their federal credential regulator. And those that are greater than $10 billion are now in that function—with respect to that supervisory function, fall under the jurisdiction of the CFPB.


But again, for state-chartered institutions, state regulators will have the authority to supervise for consumer compliance, of which there are literally thousands—if not tens of thousands. The CFPB is the only entity at the federal level that has any supervisory authority with respect to them. But, once again, state regulators have been supervising and have been examining non-depository institutions for compliance with consumer protection laws forever—as long as they’ve existed.


The supervisory and the authority is closely related to the enforcement authority. No surprise then that it’s a bureau since its very inception and continuing through all administrations have linked them. Supervision and enforcement are part of the same silo. I was Associate Director of Supervision and Enforcement.


Nonetheless, they’re, in my view at least, very distinct tools. The supervisory function has historically been, in my judgment, at the prudential level—and it has been and should be at the CFPB—a collaborative process. The Bureau is entitled to conduct examinations. They have very broad authority to demand the production of documents, to understand the risk mitigation and programs and general compliance management systems that the institution is deploying in order to comply with federal consumer protection laws.


At the end of the day, if the Bureau believes that some of those processes are deficient, they will notify the entity. They will notify the supervised entity. In some cases, those issues will rise to the level of a matter requiring attention. They will instruct the entity to get the problem fixed within a certain defined time period. 


But it is worth noting that that is, ultimately, a voluntary process. The institution is entitled to ignore the matter requiring attention. They can fix it in a way that they think is appropriate that the Bureau staff might disagree with. There’s considerable risk. There’s considerable risk to the institution for doing that. That’s a fairly certain way to have your problem moved from supervision over to enforcement.


But nonetheless, if a matter does move to enforcement and it does result in an enforcement action, the entity will not be prosecuted for failing some sort of supervisory task. They’ll be prosecuted. There’ll be an enforcement action because the enforcement division has identified acts that predicate that enforcement action. So therein lies the rub.


I think some administrations at the CFPB have been more willing to treat supervision as simply a pipeline to enforcement, which I think blurs an important line between those two tools because, if you’re trying to collaborate and work towards compliance when the entity might think that, in reality, this supervisory event is nothing more than a disguised civil investigative demand, I think that that blurs important lines.


And then in the context of this discussion, it’s provocative of why did the Bureau select the supervisory tool to introduce their new and rather expansive theory of why unfairness includes discrimination? And one reason, perhaps, is it provides them some insulation for a reinforcement attack because, as I mentioned, supervisory activity is ultimately collaborative and voluntary. 


Supervision doesn’t arguably create new legal obligations. So when they amend the exam manual to explain how they are thinking about the world and how they — what they will be looking for, arguably, that’s not creating any change in a legal obligation that the entity has.


However, I think that there’s some disingenuity there that may be helping them protect themselves from a lot of the litigation attacks that Brian will be do a much better job of describing. But I think that I’ve always thought of everything that the Bureau does, every blogpost that the Bureau puts out, every press release that they put it out, indeed, every supervisory event is a great example of the Hawthorne effect: the act of observing something affects the thing observed.


So while the supervisory tool may be chosen for amendment, in this particular case, to provide some litigation advantage, I think it’s disingenuous for the Bureau to think that entities are not going to view it as, essentially, a change in their legal responsibilities. The Bureau has now said what they’re going to be looking for, and many entities will take that as a requirement that they provide that the Bureau is wanting them — what the Bureau is going to be asking them for their supervision.


So, I think, at the very threshold, it’s just interesting to consider the tools that the Bureau has at its disposal, how they can be used—in my view—in a seamless, coordinated fashion, how they might be being misused as simply one being an extension of the other in a way that fails to recognize its unique existence, and then what are the effects of litigation advantage versus what—presumably they know or think they know—entities will actually do in response to their provocation.


Todd J. Zywicki:  Well, thank you. Brian Johnson, we’ll turn it over to you. You might want to elaborate a bit more on what the CFPB specifically has done on UDAAP and then talk about their general efforts here and litigation challenges to that ruling—whatever else you think is relevant. The floor is yours.


Brian Johnson:  Sure. Thank you, Todd, and thanks to The Federalist Society for the invitation to speak. So let me set the table a little bit. We’ve talked about CFPB’s supervision in general. Let me, I guess, describe the series of events that have unfolded over the past year or so to bring folks who are closely tracking this issue up to speed a little bit.


So why are we discussing this matter today? It’s really because, in March of last year—mid-March—the CFPB announced that it would begin using its authority to prohibit unfair acts or practices. One of the tools it has under its UDAAP authority—so-called UDAAP authority—to address alleged discriminatory conduct that occurs within financial services markets, but outside of the offering—or the explicit offering or provision—of credit, which are already covered by a variety of fair lending laws, depending on the circumstances.


And in a press release associated with the Bureau’s announcement, Director Chopra said, “We will be expanding our anti-discrimination efforts to combat discriminatory practices across the board in consumer finance” and specifically then said that CFPB examiners “will require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.”


So the Bureau may be arguing otherwise in present litigation about the mandatory nature of what’s being required of supervised entities. But the Bureau, at the point of announcement, was pretty clear that these are requirements and, therefore, binding as opposed to discretionary or voluntary compliance activities.


So what did the Bureau do? In association with the announcement, it issued revisions to a portion of its examination manual, and the portion was the UDAAP chapter for examination manual. And it did a couple of things. So it provides new instructions for examiners when evaluating potential UDAAP violations. 


And, for instance, it instructs them to conclude that a discriminatory act or practice is not shielded from the possibility of being unfair, even when fair lending laws do not apply to the conduct. Examiners, in addition, must now obtain and review copies of new documents, make new determinations regarding compliance programs and processes, must undertake new considerations when evaluating internal controls, and must undertake new determinations, evaluations, and considerations when conducting transaction testing.


So the Bureau’s announcement was a surprise in the sense that the CFPB and its history had never articulated the idea that unfairness, as a tool, can be used to reach alleged discriminatory conduct. But there were some precursors that maybe foreshadowed the development at the Bureau, and that’s that Director Chopra, before serving as director of the CFPB, was a commissioner at the FTC. 


And back in May 2020, in a case called Liberty Chevrolet, he had filed a concurring opinion in that case, where he indicated his view that using disparate impact analysis and other tools, the commission can use its Section 5 FTC Act on fairness authority to attack harmful discrimination in “other sectors of the economy.” And he said that this means that the FTC Act can serve as an important gap filler to combat discrimination across the economy.


And so, clearly, now Director Chopra had been thinking about the scope and extent of unfairness authority and whether or not it could be used lawfully to address, again, allegations of discriminatory conduct—either across the economy in the FTC context or with respect to consumer financial products and services outside of lending in the CFPB context.


So also interestingly, two weeks after the CFPB announced its exam annual changes, now FTC Chair Khan and Commissioner Slaughter of the FTC, in a case called Napleton Auto, filed their own concurring opinion in that case and endorsed the CFPB’s approach—or their interpretation of unfairness—as being able to encompass concepts of discrimination.


And then, at the time, of course, there were only four members of the commission, and so not a majority of commissioners confirmed to advance that theory or argument in a live case, so to speak. So it was a concurring opinion. But subsequently, Alvaro Bedoya was confirmed in May of last year as a commissioner.


And so, in August, in a statement associated with an advanced notice of proposed rulemaking that the FTC issued, Commissioner Bedoya also endorsed that view. And so, just last October, in a case called Passport Automotive Group, the FTC formally brought a complaint, where one of the counts was that alleged discriminatory conduct constituted an unfair act or practice in violation of the FTC Act.


And Commissioner Phillips—I believe this was his final case as a sitting commissioner—essentially, said in his dissent that he would have gone along with the rest of the case but for this allegation. And he said that, essentially, this theory exceeds the FTC Act boundaries and that unfairness can’t actually encompass the type of discriminatory conduct that the majority of the commissioners were alleging. And colorfully, he said that Section 5 of FTC Act is not an anti-discrimination statute: “No beak, no feathers, no walk, no quack. It’s a terrific consumer protection tool, but it’s no duck.”


And so this issue had been brewing. And adding to the back and forth, I would say, is in June of last year, the American Bankers Association—in conjunction with the coalition of other financial services trade associations—issued a white paper. And the white paper was a response to the Bureau’s articled view of the limits or the expanse of unfairness to encompass discrimination. And the white paper took issue—perhaps not surprisingly—with the articulated view coming from the CFPB and made a series of arguments.


One is that the Bureau’s conflation of the concepts of unfairness in discrimination were contrary to the text, structure, and legislative history of the Dodd-Frank Act. In particular, the white paper also argued that the Bureau’s view of unfairness is inconsistent with decades of understanding of the concept of unfairness as understood since 1938 as an authority that the FTC had had. And it’s contrary to the Supreme Court’s view of disparate impact liability as represented in the 2015 Inclusive Communities case, which related to disparate impact and the FHA.


So that white paper was hanging out there, and the question was, “When’s the next shoe going to drop? Is the CFPB going to cite an institution in an exam? And what, if anything, comes of that? Or would industry—having taken the position of the white paper amount pre-enforcement APA—challenge to the Bureau’s action itself?” And that shoe did drop. 


And on September 28 of last year, the U.S. Chamber, along with a coalition of trade associations, filed a complaint in the Eastern District of Texas. The case was assigned to Judge Barker, who was a recent Trump appointee. And quickly thereafter, the plaintiffs moved for summary judgment. And so we’re now in the back and forth of competing motions and Bureau reply and the plaintiff’s response, etc. Where it stands now is the most recent filing in the case was on January 24, and it was the Bureau’s reply to the motion to dismiss.


And so a lot of argumentation within the context of the litigation itself. The plaintiffs in the case have been joined by a coalition of a red state attorneys general, who have their own views on what the Bureau’s doing, and are asserting state interests in the litigation as well.


So I’m happy to dive in, I guess, a little bit on some of the claims or arguments that are being made back and forth. They tend to be—as these things are—both procedural and substantive in nature. But, Todd, I think I’ll stop there in terms of the table setting and turn it back over to you.


Todd J. Zywicki:  Well, thank you, both Brians. And one of the things that’s interesting as people observe this is the way this UDAAP rule, which was really quite a dramatic change in policy. As Brian Johnson indicated, this is not something that had previously been thought. 


The UDAAP power has been around for a long time, as has ECOA. It’s quite striking that —as was alluded to by both speakers—it was really just the change of one paragraph in the middle of the very technical otherwise supervisory manual that is basically filled with green eye shade sorts of compliance procedures and that sort of thing that articulated a very bold and novel interpretation of equal lending, equal access to financial services and that sort of thing.


And, Brian Johnson, you touched on it at the end. A cynic—perhaps a realist—looking at this could look across sort of the broad scope of what this administration has done: whether it’s the CFPB, whether it’s this, whether it’s its use of circulars. You can look at the way in which the student loan program was — relief program was released, for example, where they originally released it. And then, as soon as they were challenged, they tweaked the program specifically to try to moot out the lawsuit—it appeared not for any substantive purpose.


Is it conceivable that one of the things that we are seeing with this administration is specifically the use of the versions of soft power or regulatory dark matter—or whatever—specifically to evade judicial review specifically to evade notice-and-comment rulemaking and the like? 


And it brings to mind during the Obama administration when the CFPB announced its auto-dealer guidance on equal lending. And Senator Pat Toomey requested an opinion, and it was held to be a final rule that could be challenged under the Congressional Review Act. And is that what we’re kind of reliving right here, which is this effort to avoid judicial review, to avoid calling something a rule, and thereby, to avoid—not necessarily in this case the Congressional Review Act—but judicial review to avoid rulemaking? And what does that precedent perhaps of the auto-dealer guidance during the Obama administration potentially tell us about how this may play out here?


Brian Johnson:  Sure. Well, I won’t hazard a guess on the relative prevalence of this tactic from administration to administration. Undoubtedly, it probably changes. But I’d say, as a general proposition, agency attorneys are no doubt creative in trying to find ways to make life easier for their bosses. And if agencies want to do something, they find a way to do it. The question is how meticulous are they being about dotting their i’s and crossing their t’s in terms of fulfilling the procedural requirements of the Administrative Procedure Act, where you touched on the Congressional Review Act, or other requirements in the context of rulemaking.


It does seem that this has been a phenomenon that’s existed for a while. And I’d say the history of APA challenges—both in the D.C. Circuit or in other judicial circuits—attests to the idea that agencies are trying to push the envelope here. And the courts have been pretty clear that, in reviewing agency action, you need to look to the substance, not the form because there’s a clear incentive for agencies to label something one way when they actually intend something else. 


And so it’s not surprising that, for instance, in the litigation between the chamber and the groups and the CFPB here, the CFPB is arguing, “Hey, this is not final agency action because we’re not opposing new substantive legal obligations on people that underline laws. What does that? And we haven’t changed things with the exam manual.”


And the plaintiffs, to the contrary, are saying, “You absolutely are imposing these new obligations, and you’re doing it in a form—though not in a substance—that is designed to skirt the requirements of notice-and-comment full, legislative rulemaking.” And so that’ll be hashed out based off of existing precedent.


I do think that agencies or, say, the CFPB in particular, has had more of a short-term focus in terms of its overall strategy and that council is generally against building a large number of enforcement investigations, which take a couple of years to come to fruition. Council is against engaging in an actual legislative rulemaking process, which requires significant internal resources and takes, again, 18 months minimum to move through a final rule and then maybe face a challenge afterwards.


And so what we have seen particularly over the course of last summer was the CFPB really using bully pulpit to try and move markets in the direction it wants through things, like the junk fee initiative, and through guidance documents—new versions, of which, were issued. It’s called circulars—which you mentioned, which the Bureau indicated are supposed to be statements of policy as opposed to be interpretative rules or legislative rules.


Folks’ eyes may glaze over on the fine distinctions. But it’s important in a judicial challenge context because the statement of policy is supposed to be an expression of on a go-forward basis how an agency intends to exercise its discretion. And that’s not subject to judicial review, whereas an interpretative rule, which is the agency saying, “This is our view of what the law or underlying regulation is” is subject to challenge.


And so these circulars are interesting in that they’re labeled statements of policy, but they literally have a question presented and then apply facts or circumstances to existing law to reach agency conclusions about what the law would require or mean. Under normal circumstances, that would be considered to be an interpretative rule at a minimum. And an agency can have a correct interpretation of the law. They can have an incorrect interpretation of the law. Or maybe there are multiple competing interpretations. And that’s the type of agency action that is subject to judicial review and has been litigated heavily in the past.


So to your question, Todd, I do think there are some indications that agencies—and the CFPB in particular—are, if not stepping over the line, toeing the line very closely in some of these fine distinctions and using maybe labels on actions that may have a different kind of substantive effect.


Todd J. Zywicki:  Not necessarily fully focused on the accuracy of the label. But perhaps, Bryan Schneider, do you have a comment on this?


Bryan Schneider:  Well, I certainly agree with everything stated. I’ve not done an empirical study across administrations. There does seem to be just dealing — working in this area of financial services regulation, speaking with clients that are trying to figure out what do they need to do on a daily basis. The velocity in recent months from the CFPB just seems dizzying. I mean, every day, there’s a new blogpost or a circular or this or that. Some days, they’re coming up with — it seems like they’re coming up with new categories of what they’re talking about. So, to me, it’s just dizzying but also quite effective.


I mean, who likes to pay a junk fee? Who could ever be for a junk fee? Of course, many of the fees being characterized as junk fees are explicitly authorized by federal statutes. And nonetheless, that battle may not definitely have been won by the Bureau. 


But just the other day, I saw ads that are now advertising that is now embracing this notion of, “Well, we don’t have junk fees. We’re getting rid of all of these. We’re getting rid of all of these fees” that they have expressed federal authority to impose—if they wish to impose, if that’s part of their business model.


So none of this could be accomplished. If we subjected agencies to more careful, deliberate rulemaking, decision making, you can get there. You’ll just get there in a more informed way where entities are not constantly worried about being caught off guard because they missed a blogpost or failed to recognize that, from the Bureau’s perspective, the musings in a blog post are basically as good as a rule.


Todd J. Zywicki:  Well, and that seems like, as you observe this, the catch here is in these heavily regulated industries—particularly financial services—just saying something seems to, essentially — they treat it as having the force of law, a blogpost or whatever. And the regulators seem to recognize this. And so whether it’s everything that’s being revealed — and this isn’t just financial services. 


I mean, why is it, for example, that everything that’s being revealed about Twitter and the alacrity and the cooperation that Twitter gave to the federal government, whereas defenders of what the government was doing would say, “Well, they didn’t have to,” right? But everyone understands that, with the tools of the modern government regulatory stage, regulation by a raised eyebrow is a real thing, right? We saw it during the Obama Administration with Operation Choke Point. We’re seeing it with Twitter and a lot of these things.


And so what you end up getting is it seems that, de facto, you get compliance. You get the effect of binding rules, but yet there’s a little bit of a — this government can play a little bit of a shell game where they say, “Well, we’re not telling you you have to do it. It’s just a guidance or a blogpost, right? We’re just trying to be helpful.” 


And then, when you try to challenge them, they say, “Well, you’re not required to do it.” But, at the same time, there’s a sense in which people understand, it seems like, that there is a threat that lies behind that, and rarely does the sword have to be unsheathed. And that seems to me to be potentially the problem we run into in trying to constrain these less formal means of lawmaking or regulation.


In case anybody has a comment, go ahead. Yeah. So well, let’s turn to some Q&A.


Bryan Schneider:  Yeah, I don’t disagree at all.


Todd J. Zywicki:  Oh, you don’t disagree at all? Right. And so Julius Lozer (sp) has a question in the Q&A. He asked, “What might be some of the practical effects of the CFPB action, e.g. on bank marketing of deposit services, trust services, and the like?” 


And I think, to some extent, you were addressing this, Bryan S., when you were talking about how so-called — how banks seem to be — financial institutions already changing their pricing practices simply from the threat of having them labeled “junk fees.” But what do you think more generally the effects of all this will be—and perhaps on the UDAAP examination change specifically, if that survives challenge?


Bryan Schneider:  Well, certainly, the practical effect is you’re now subjecting a product that had never been — I wouldn’t say never, but there was no inherent thought that you would subject your deposit marketing, your deposit practices to the full-blown scrutiny of an analysis that financial institutions do every day with respect to ECOA and their credit transactions.


So there will be presumably a build-out in all of that compliance activity. And I think it introduces a great deal of certainty with the Bureau because, to some extent, this is not a fully fleshed out rulemaking—just an assertion of some general authority. What is the scope of that authority? Does it apply? Is this discrimination that they’re suggesting is subsumed by unfairness? Is it the traditional protected classes that we’re all accustomed to in other discrimination laws? Does it apply to other forms of discrimination? What’s an institution to do?


So I think it introduces considerable uncertainty for regulated entities as to what they’re supposed to do if they wanted to take seriously what the Bureau says is now some sort of new legal obligation, but — which I think then shows, ultimately, the deficiency of some of these more informal attempts to articulate obligations. It all sounds good; it’s a wonderful press release. But exactly what is an institution supposed to do if they are inclined to do anything at all?


Brian Johnson:  Well, I would agree with that. If the Bureau is to proceed, undoubtedly, it needs to release much more guidance how it actually intends to carry out its new articulated legal concept. And you could think, for instance, there’s — to which product verticals or to which covered persons or services providers in particular is the Bureau going to focus? What sorts of acts or practices does the Bureau believe are on a kind of risk-weighted basis—the early focus of its examination or enforcement activity. 


Are there protected classes that it has in mind? Unlike ECOA or every other antidiscrimination statute, Congress carefully sets forth the prohibited conduct with specificity and then articulates the precise protected classes, which enables industry to create metrics and measure against to assess whether or not there’s, for instance, a disparate impact of a policy or procedure on a protected class.


Here, there’s no articulated list of protected classes. So you might presume that the commonly protected classes—whether it be race or sex, age, etc.—would be the focus of the Bureau’s activity, but it’s not necessarily an exhaustive or exclusive list. And you can see, at the extreme, this precedent kind of getting away from the Bureau—or even the FTC, for instance. 


In federal hiring law, it’s a prohibited personnel practice to discriminate against an employee on the basis of political affiliation. Well, if you pull political affiliation into this, it’s not hard to foresee a future Republican CFPB director or future Republican FTC or, for that matter, an enterprising Republican state AG using mini FTC Act UDAAP authority to say, “Well, I have constituents who are complaining that they’re being denied payment processing services, or their accounts have been shut down on account of their association with charitable or political activities. And I’m going to use this tool to, essentially, enforce a Fair Access Rule.”


So there’s a lot of ways in which this kind of newly developed—it’s not even a body of loss—an articulation of a legal theory could develop. And I think it’s incumbent upon the agencies who are wishing to use this authority—assuming it survives a legal challenge—to put out significant guidance in greater detail on what the expectations are and the manner in which supervised or otherwise regulated institutions are to conform their behavior and set up internal compliance management systems that would address the articulated concerns.


Todd J. Zywicki:  Bryan J., earlier, you were, when referring to the FTC, you said about the rule, “No beak, no feathers, no walk, no quack.” It sounds to me that, to some extent, the chambers challenged down in Texas to this is that this has a beak, feathers, walk, quack, and is, effectively, a final rule that is subject to being challenged at this point. 


Have you given any thought, if that is the case, how should we think about when something that — what would be the test, the more general test, of how we should think about when some sort of regulatory dark matter or informal agency action shades over into being something that should be cognizable to be challenged or otherwise — or required to be part of a rulemaking process, for example? Have you given much thought as to what a general test might be that a court, for example, might adopt in general?


Brian Johnson:  Well, I mean, there’s the specific test of whether or not there’s waiver of sovereign immunity under APA—and so whether an agency action is subject to challenge. And that’s whether or not it’s a “final agency action,” and there’s a definition of what that means, and there’s a Supreme Court case that lays out a two-part test for determining whether something is final agency action.


More broadly, the courts are increasingly grappling with this concept of what Justice Scalia described as “hiding an elephant in a mousehole,” which is agencies finding or articulating applications of existing authority to create broad, new areas of authority, regulatory action, etc. 


And this came to a head, so to speak, just last year in the West Virginia v. EPA case, where the Court majority articulated what’s called the Major Questions Doctrine and said, “Whereas normally, in these types of challenges, we have Chevron deference and that two-step process to evaluate whether or when to grant deference to an agency’s interpretation of its own statutory authority, Major Questions Doctrine now is an overlay on that that either side steps Chevron altogether or is perhaps a competing judicial doctrine that says that, ‘In extraordinary circumstances where an agency is asserting a new authority to regulate a significant or economically major area, and it’s asserting that it’s doing so using existing statutory authority that nobody had thought before, up until this point in time, permitted them to do that,’ the doctrine, essentially, says, ‘Courts should be pretty skeptical about what the agency is articulating here.’” 


And so the ABA white paper raised the Major Questions Doctrine in the context of the CFPB’s exam manual revisions. And it was raised by the plaintiffs in the complaint. And the idea here is, “Well, wait a second.” Unfairness authority has existed at the FTC since 1938. There’s never been, to my knowledge, an enforcement action trying to reach alleged discriminatory conduct premised on a violation of unfairness authority. 


And you can’t really—at least what the complaint and the white paper argue—is you can’t really claim that you’re just using this as a gap filler exercise because unfairness existed in 1938 and, substantially, all of the major antidiscrimination statutes weren’t enacted by Congress until the 60s and 70s. So there were literally no gaps to fill for a period of time.


And to now claim that CFPB unfairness is somehow different when the agency itself—and I think the legislative history supports the idea that unfairness was a concept borrowed from the FTC Act—the argument that’s being made is that kind of strains credibility as a legitimate articulation of existing underlying authority.


Another kind of wrinkle to this is what’s claimed, I think, in the white paper is, when Congress imported over the unfairness authority, it didn’t do it in a vacuum. Congress presumes to know the history of how the FTC has used that authority in the past. And there was a significant blow up, as you know, Todd, in the early 80s, where the FTC took on a very activist mindset and tried to use unfairness to issue a series of rules that were quite expansive.


And Congress responded by—among other things—refusing to reauthorize the FTC for 14 years, curtailing its activities, putting in place a temporary moratorium on rulemaking activity premised upon unfairness. And then, in ’94, hardwired restraints on the use of unfairness into the FTC Act, which was the revised definition that was handed over to the CFPB. 


So, if Congress is presumed to be aware of those constraints in that history and didn’t alter or otherwise broaden the unfairness authority granted to the CFPB, you have to think of that definition as an effort by Congress, historically, to constrain the expansive interpretation or use of unfairness. And so the white paper — and I believe the plaintiffs are arguing that you have to read the scope of unfairness for the CFPB with that context and that history in mind.  


Todd J. Zywicki:  And I’ll note that, with respect to the challenge to the Whitehouse’s student loan forgiveness program—which, contrary to the statement, the president did not pass by a vote or two in Congress, but was actually just issued by the Department of Education—the essence — that case is going to the Supreme Court. 


And the two primary bases are, first, the statute doesn’t support it, and second, the Major Questions Doctrine on that to be able to unilaterally, essentially, take an action that will cost hundreds of billions of dollars to the Federal Treasury raises a lot of those same questions. So that’s something that people who might be interested can watch.


Wayne Abernathy asks whether the Bureau’s assertion of UDAAP, as a tool for racial discrimination enforcement, also extends that application to state attorney’s general to use? And Brian Johnson, I think you referenced that earlier. But what do you guys think about that?


Bryan Schneider:  I think it’s a very interesting point. The CFPB and state regulators and state enforcement — law enforcement authorities, like AGs working collaboratively. I don’t think there’s anything new. Certainly, when I was a state regulator, welcomed the opportunity, where appropriate, to work with the Bureau, and I think vice versa. 


This Bureau recently has been much more — has expressed direction or provocation for state attorney’s generals to proceed independently of them using authority that they assert exists in the Dodd-Frank Act. This legal theory—to the extent it’s a lawful legal theory—would presumably be enforceable by state attorney’s generals under the Bureau’s new provocation that they proceed independently, where appropriate.


I think that that raises some interesting issues around end running or the Bureau facilitating end runs around hard one statutory exemptions. The Bureau’s authority is extensive and broad. No one questions that, but there are certain very crucial to the operation of the statute—at least from Congress’s point of view—limits on that authority with respect to auto dealers and retailers.


Arguably, those exemptions don’t apply equally to state enforcement authority. So I think the interplay between this new expansive substantive theory — the Bureau’s willingness to encourage independent action by state enforcement authorities is worth watching.


Todd J. Zywicki:  We’re almost out of time, but I want to ask one short question and then a wrap-up question. This is for Bryan Schneider specifically, but maybe for both of you. When I was chair of the CFPB Task Force, we got a number of comments from — in our public comments about the process for challenging supervisory decisions. And this perhaps applies to the manual generally—but interpretations, for example, of law regulations and the like that a supervisor out in the field. And people may not be aware, but by far the largest division of the CFPB in terms of headcount and budget are examiners, and they work in a very decentralized manner all around the country. 


And, Bryan Schneider, I’m sure, trying to keep track of everything they were doing on a day-to-day basis is, well, not an impossible task. But there was a perception that people had that many people felt like the process for challenging a decision by a supervisor on how to interpret rules, regulations, or whatever, was not suitable. They felt like the process did not have sufficient independence due process and the like. We made some suggestions about this with respect to the task force. But perhaps you could comment briefly. 


Brian Johnson’s talked a lot about the ability to challenge this in a court. But what about the ability to challenge this internally at the CFPB? Is there a process by which people can challenge decisions by an examiner, for example, where they decide that you violated UDAAP by engaging in unfair behavior? And how do you keep control of hundreds of examiners out there in the field who might be making these sorts of decisions?


Bryan Schneider:  Well, certainly, there is a process for appealing supervisory decisions. I think that they would tend to be sort of fact-specific determinations. However, I suppose there’s nothing preventing you from saying, “I do not believe you have — this newly articulated legal theory you have, I do not believe exists. Therefore, I’m appealing it.” Presumably, you would lose that appeal.


I think that the supervisory appeal process tends to be a little bit more fact specific that says, “The law may say this, but the facts that you’ve elucidated in your exam don’t rise to a violation.” I know the perception, depending on what side of the table you’re on. I always felt that that was a fairly rather — was taken quite seriously when entities did raise those issues. 


I did not feel that it was — it did not seem to me to be a kangaroo court. I know perhaps, on the other side of the table, maybe it seems that way. But there is that ability within the supervisory process to say, “I don’t think that you’ve reached the right decision based on the facts.” I’m not sure that that’s really meaningfully — the one who really meaningfully avail that process to challenge sort of broad-based legal interpretations like this.


Brian Johnson:  I just had one thing real quick. I’ll just take ten seconds here. So there is a so-called dormant authority lying within a fan of Frank, which is the — in 1025(e), which is the large bank supervision provision. Barney Frank inserted into Dodd-Frank a mechanism by which banks could appeal exam findings. 


The way it works is there’s supposed to be a simultaneous examination between a prudential regulatory and the CFPB, where the two agencies are supposed to exchange their exam findings. And, to the extent that the bank challenges any of the exam findings, there’s a process by which the decision is sent to an independent review panel, consisting of those two agencies plus a third that wasn’t involved in any of the examinations.


And, on top of it, there’s a mandatory rulemaking, where the agencies—on a joint-agency rulemaking basis—are supposed to promulgate anti-retaliation protections for banks to ensure that they feel comfortable exercising their statutory rights. For reasons I’ve written about, none of this has ever come to pass. 


So the question is, “When is that mandatory rulemaking going to be written? And will institutions—large banking institutions—ever feel comfortable invoking that process?” And there’s been movement at the CFPB on this score and at FDIC on this score on what an exam appeals — what a credible exam appeals process looks like.


Todd J. Zywicki:  I’m going to ask one last question because I see Colton’s about to give me the hook, and I’m going to — so it’s inspired by Ralph Reddick’s question in the Q&A. I’m going to tee this up for Brian Johnson because I know you’ve thought about it a lot—both as part of the CFPB, but also on the congressional side of things.


We know that under Seila Law, the original structure of the CFPB involving a single director structure was declared unconstitutional. We have this case bubbling up now from the Fifth Circuit—which I believe the Court has not yet taken on cert, but it fully expects that it probably will—involving appropriations. If you are inclined to give us your thought on what you think might happen with that, Brian, and if the Court does strike down the appropriations of the CFPB—which, in this case, would nullify the rule that is being challenged—where do you potentially see the future of the CFPB going from there? 


Brian Johnson:  So that’s a lot of conjecture. Let me pull out the crystal ball for a moment. So we’re in a world where we assume that the Court grants cert—and so examines the constitutionality of the funding structure. We’re also in a world where maybe you presume that there are five votes to say that there’s a separation of powers problem.


The question is remedies and how the Court might address the outcome. I mean, the requested relief in the Fifth Circuit case was just invalidate the portion of the rule that was challenged originally and let everybody move on. And, of course, other folks will make decisions on that basis.


But one of the potential consequences is if the funding structure is invalidated, the Court could stay judgment, or Congress could step in and act and decide what an appropriate funding structure would be. Presumably, House Republicans would say, “We want annual appropriations, a Republican-controlled House, Senate-controlled — or a Democratic-controlled Senate.”


And so you have to think that whatever the House ask is is maybe the high-water mark in terms of structural reform, and what survives is what the administration is willing to sign off on and not issue a veto threat for and what the leadership in the Senate ultimately agrees to. And there’s a lot of interesting back and forth—both historically—in terms of dug-in positions and then, now, situationally on what might be in play and what is clearly off the table.


Todd J. Zywicki:  And I will say, my own two cents on that is prompted in part by Steve Dewey’s question as well is, “I don’t see any — even if that happens, I don’t see any realistic scenario under which CFPB disappears.” It’s obviously a very popular agency as a political reality. Trying to unwind the CFPB strikes me as highly unlikely. And so I would agree with that that, basically, if it goes down that road, it then becomes a bargaining game between what Republicans asked for what Democrats provide.


And, Bryan Schneider, do you have any final words on that case or anything else, or should we wrap up?


Bryan Schneider:  I’m not sure I have a lot to add. I think I agree that it really becomes just a bargaining game because it would be, I think, politically difficult to eliminate the agency in its entirety. But you could not only get a structure of the agency. The particulars around appropriation, I think, are all fair game, which would be an important oversight of an organization that, right now, is not terribly responsive to the will of Congress.


Todd J. Zywicki:  And that is one of the other questions, which would be whether it would be tossed into the mix: restructuring the agency as a bipartisan commission or adjusting its powers now that it has been declared an executive agency rather than an independent agency—should that create a reevaluation of its powers as part of that process.


Bryan Schneider:  Right. Exactly.


Todd J. Zywicki:  Colton, I think we are done here. And I want to thank both Brian Johnson and Bryan Schneider for this terrifically illuminating discussion—both of the details of how this all plays out but as well as the more general principles that we’ve discussed in terms of financial regulation generally and the challenges of the modern regulatory state the use of these less formal mechanisms of authority. 


So, Colton, do you have any final words for us?


Colton Graub:  I just want to echo what you said, Todd. We’re very grateful to all of you for your time today and for the insightful discussion on this important issue. For those of you in the audience who joined the conversation midway through, you can listen to the recording when it is released via our podcast feed in the coming days.


We welcome listener feedback by email at [email protected]. Thank you for joining us. This concludes today’s discussion. 




Conclusion:  On behalf of The Federalist Society’s Regulatory Transparency Project, thanks for tuning in to the Fourth Branch podcast. To catch every new episode when it’s released, you can subscribe on Apple Podcasts, Google Play, and Spreaker. For the latest from RTP, please visit our website at




This has been a FedSoc audio production.

Brian Johnson

Managing Director, Banking Supervision and Regulation Group

Patomak Global Partners

Bryan Schneider


Manatt, Phelps & Phillips, LLP

Todd J. Zywicki

George Mason University Foundation Professor of Law

Antonin Scalia Law School, George Mason University

Antitrust & Consumer Protection

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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