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Unraveling the CFPB's UDAAP Update: Legal Analysis and Implications for Regulatory Authority

ABSTRACT: In a recent opinion from the United States District Court for the Eastern District of Texas, the Court examined the Consumer Financial Protection Bureau’s Unfair, Deceptive, or Abusive Acts or Practices portion of its Supervision and Examination Manual.

The Consumer Financial Protection Bureau (CFPB) has found itself entangled in a complex legal dispute stemming from its March 2022 update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) portion of its Supervision and Examination Manual. This blog post will provide an in-depth legal analysis of the situation and explore its broader implications for regulatory agencies and their authority.

Background: The crux of the controversy lies in the CFPB's directive to its examiners. This directive instructs them to meticulously scrutinize companies for any signs of discrimination against unspecified protected classes and for how well these companies evaluate statistical disparities in their business practices. In response to this directive, plaintiffs have filed a lawsuit seeking relief, arguing that the CFPB's examination directive must be invalidated for several reasons. These reasons include alleged violations of the Appropriations Clause of the Constitution, exceeding the agency's statutory authority, and violations of the Administrative Procedure Act (APA).

Sovereign Immunity: At the outset, the defendants sought to dismiss the case on grounds of sovereign immunity, contending that none of the plaintiffs' claims, whether related to the APA or not, met the requirement of "final agency action" as stipulated by 5 U.S.C. § 704. However, the court took a nuanced approach, asserting that the waiver of sovereign immunity under 5 U.S.C. § 702 applied to certain claims. This was particularly relevant for claims that sought injunctions and declaratory judgments related to unconstitutional funding and acts that exceeded statutory authority.

Article III Standing: Plaintiffs effectively established that they had the necessary standing to bring this case. They provided declarations that demonstrated their members were incurring costs directly attributable to the new UDAAP provisions. Defendants contended that the use of pseudonyms and common nouns in describing affected members hindered the identification of those suffering harm. However, the court rejected this argument, highlighting that plaintiffs had provided specific evidence of harm incurred by identifiable members.

Appropriations Clause: Perhaps notably, the defendants conceded that if the court were to address the merits of the Appropriations Clause claim, it should rule in favor of the plaintiffs. This concession is grounded in a binding decision from the Fifth Circuit Court of Appeals. The challenge related to the CFPB's unique funding structure, which has long been a subject of debate.

Statutory Authority: The court ruled in favor of the plaintiffs on their claim that the CFPB had overstepped its statutory authority by including discrimination within the purview of UDAAP without clear and explicit congressional authorization. The court emphasized that Congress had not provided the agency with the unequivocal delegation of authority necessary to support such a sweeping interpretation.

Remedy: Concerning the remedy, the court issued a declaratory judgment, stating that pursuing any examination or enforcement action based on the challenged UDAAP interpretation would be unlawful. The court also granted an injunction against such actions. In line with established precedent, the court ordered the vacatur of the agency action.

Conclusion: The legal battle surrounding the CFPB's March 2022 manual update underscores the intricate constitutional and statutory questions that can arise in the context of regulatory agencies. This case serves as a significant reminder of the importance of clarity in agency authority and the need for agencies to conduct thorough legal assessments of their directives. The court's decision not only addresses the specific concerns raised by the plaintiffs but also reinforces the checks and balances in place to ensure that regulatory agencies operate within the confines of their designated authority. As regulatory agencies continue to shape various industries, this case highlights the pivotal role of the judiciary in defining the limits of their power.