Chevron Doctrine Update
Since the Supreme Court issued its decision in Loper Bright Ent. V. Raimondo on June 28, attorneys and regulated entities have been buzzing with discussion of the implications. The Loper decision overturned the Chevron doctrine, which, for the past 40 years, set rules for how the federal courts reviewed agency regulations.
What was the Chevron Doctrine?
The Chevron doctrine was originally set out in the Supreme Court’s 1984 decision Chevron v. Natural Resources Defense Council. At its simplest, Chevron required the federal courts to defer to regulator interpretations of statutes where there was ambiguity in the statute and the regulator’s proffered interpretation was reasonable. Because statutory ambiguity is the basis of a significant number of challenges to federal regulations, Chevron has been cited in thousands of decisions over the years. Chevron has been applied to the interpretation of everything from “interest” in the National Bank Act to an “exchange” for purposes of the Affordable Care Act.
What did the Court decide in Loper?
The Court determined that no special amount of deference is due to an agency’s interpretation of a statute. It therefore overruled the Chevron doctrine, while also stating that it was not overruling any particular cases that had applied the Chevron doctrine, including the Chevron case itself. Courts will therefore no longer give special deference to an agency’s interpretation of a statute.
Why did the Court overrule Chevron?
The Court’s decision was based on three central arguments.
First, the Court considered separation of powers. It stated that the interpretation of the law is the province of the Judiciary branch and that it would be improper for the judiciary to defer to the interpretations of agencies, which are part of the Executive branch, in this regard. Under Loper, Congress may still delegate authority to an agency to interpret or apply a requirement, but that authority must be granted explicitly by Congress and may not be inferred from ambiguity in a statute.
Second, the Court stated that Chevron is incompatible with the Administrative Procedures Act (APA), which requires the court to decide all relevant questions of law and interpret relevant statutory provisions when reviewing regulatory action. Loper states that the APA’s requirement does not allow a court to defer to an agency’s interpretation. Because courts are routinely required to resolve statutory ambiguity in other areas of law, the Court determined that for courts to refrain from resolving ambiguity in this limited sphere would be both unreasonable and in conflict with the requirements of the APA.
Finally, the Court stated that Chevron has not been applied consistently by lower courts nor applied with any frequency by the Supreme Court. The Loper opinion notes tweaks and modifications that were made to the Chevron doctrine over time in what it characterizes as an effort to reconcile Chevron with the APA and the Constitution, concluding that the revisions to the Chevron doctrine have complicated it to the point that it is not functional in many instances, even though it still has not achieved the necessary reconciliation with statutory and constitutional requirements. Ultimately, the Court determined that Chevron was fatally flawed.
How will the federal courts review regulations after Chevron?
The Court overruled Chevron. So how will courts decide challenges to regulations going forward? It appears, based on the Court’s precedents and the language in the Loper opinion itself, that the standard going forward will be Skidmore v. Swift & Co., a 1944 case that gave some deference to the agency’s interpretation of a statute, although it was not as deferential as Chevron.
Under Skidmore, furthermore, the extent of the Court’s deference may be case specific, as the level of deference “will depend upon the thoroughness evident in [the agency’s] consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade…” Ultimately, then, it appears that post-Chevron deference will be less extensive, not automatic, and ultimately depend on the persuasiveness of the agency’s reasoning. It is likely that future cases will develop the analysis in Skidmore further to provide more concrete guidance on the interpretation of ambiguity in regulatory statutes.
What does this mean for banks?
The Loper case involved a regulation that does not affect banking, so this case will not have any immediate, identifiable consequences for the banking industry. Pending and future legal challenges to banking regulations, however, will likely be reviewed under the Skidmore test rather than Chevron, potentially lowering the bar that a challenger must clear to obtain a ruling overturning a regulation. Current challenges to various regulations, such as the new CRA rule or the Section 1071 rule, will be decided based on which interpretation the Court finds more persuasive. Although the persuasiveness of the agency’s argument may be substantial based on its expertise, research, and arguments, the challenger will not necessarily be required to show that the agency’s interpretation is unreasonable or exceeds the authority granted by Congress. In summary, it appears that the Loper ruling will increase the chances of federal courts rolling back regulations based on the court’s interpretation of the statutes authorizing those regulations. Compliance Hub will continue monitoring and provide updates as they become available.
Changes Coming to Mortgage Servicing Rules
On July 10, 2024, the CFPB issues a proposed rule that would modify the requirements for loss mitigation and delinquency procedures. The proposed changes include fairly significant changes to early intervention and loss mitigation procedures, as well as the possibility of a requirement to provide information in Spanish and other languages.
The proposed changes would require additional information in early intervention notices, including a description of loss mitigation options offered and a website where the borrower can obtain a list of the options available from the creditor.
The proposal would also change the overall framework for loss mitigation by defining the “Loss Mitigation Review Cycle” as the period beginning when an oral or written request for loss mitigation assistance is received, changing the focus of the process and timing to the borrower’s request for assistance rather than the receipt of the loss mitigation application. The proposal would not require the borrower to be delinquent for a specified period (or at all) or to submit any formal application to begin the Loss Mitigation Review Cycle.
Loss mitigation options could be reviewed sequentially under the proposed rule, eliminating the requirement that the servicer evaluate the borrower for all options at once. Deferrals and forbearances (in addition to modifications) would be included as “loss mitigation.” Decision notices for any of these options would need to include the “key borrower-provided inputs” that were the basis for the decision, whether it is an offer or a denial, as well as instructions on where the borrower can obtain a list of the creditor’s loss mitigation options, and information on loss mitigation options that may still be available to the borrower.
While the current loss mitigation rules prohibit creditors from making an initial foreclosure filing or moving for foreclosure sale while the borrower has an open application for loss mitigation, the proposed rule would expand that to prohibit beginning or advancing the foreclosure process during the Loss Mitigation Review Cycle. “Advancing” is not defined and the proposed commentary provides limited examples of what does or does not constitute “advancing.” It’s not clear, for example, whether attending a case management conference, responding to discovery, or participating in a mediation that is a required step in the foreclosure process under state law would “advance” the foreclosure. It seems likely that “advancing” may be a broader prohibition than that in the current rules.
The new rules would also remove the provisions related to the loss mitigation appeal process and place challenges to a loss mitigation determination within the scope of the existing error resolution procedures.
Finally, in the preamble to the proposed rule, the Bureau indicated that it intends to include in the rule certain requirements related to limited English proficiency (LEP) consumers. It does not, however, include proposed text for these requirements. The suggestion in the proposal, however, is that servicers would be required to make translations available for certain written notices and oral communications. Servicers would be permitted to choose the languages that they make available, but Spanish would be required and the servicer must include any other languages necessary to “address the needs of at least a significant majority of their non-Spanish speaking” LEP borrowers. The proposal does not raise the possibility of a de minimis threshold of non-Spanish speaking LEP borrowers or a maximum number of languages a servicer could be required to accommodate to meet this requirement.
The proposal includes a request for comment and includes several questions specifically on which the Bureau is looking for feedback. As always, Compliance Alliance will keep our members updated as more information becomes available.
Section 1071 is Picking Up Again
The CFPB released the interim rule adjusting the mandatory compliance dates on June 25, 2024. As the Bureau had previously stated, the compliance dates are extended by 290 days as a result of the injunction that was ordered in Texas Bankers Ass’n v. CFPB. The injunction terminated on May 16, 2024 when the Supreme Court issued its decision in Comm’y Fin. Servs. Ass’n of Am. Ltd. v. CFPB.
The new compliance dates, while different from what was originally in the rule, remain the same as the CFPB stated immediately after Community Services was decided: Tier 1 (2500+ loans) lenders are required to comply on July 18, 2025 and report on June 1, 2026. Tier 2 (500+ loans) lenders are required to comply on January 16, 2026 and report on June 1, 2027. Tier 3 (100+ loans) lenders are required to comply on October 18, 2026 and report on June 1, 2027.
On June 1, 2026, Tier 1 institutions with a July 18, 2025 compliance date will only be required to report data for the period of June 18 – December 31, 2025. Similarly, on their first reporting dates, Tier 2 and 3 banks will only be required to report data for the period from their respective compliance dates through December 31, 2026.
One of the biggest questions banks had about the delays to 1071 implementation was whether the delay would change the years that a bank uses to calculate its tier. The interim rule states that banks may continue to use 2022-23 numbers as provided in the original rule, or they may use their numbers from 2023-24. This is used to determine what the bank’s compliance date will be, when it must begin collecting data.
Whether the bank is required to report the data in any given year will still be determined by the loan volume from the two consecutive years prior to the reporting year. The interim rule added several examples in the commentary illustrating how to apply this change to different situations. The way the new dates will apply will vary by institution and require banks to dig into the language of the revised rule with their own specific loan data. Smaller lenders, for example, find their compliance dates determined by their 2024-25 loan volumes. The new comments clarify that a bank originates 100-499 covered loans per year in 2022-23 but under 100 in 2024 or 2025 would not be required to comply with the rule on October 18, 2026 because it would no longer meet the definition of a financial institution in 2026.
The “grace period” provision allowing banks to begin collecting data one year prior to their applicable compliance dates remains unchanged, although that year will now be calculated from the newly adjusted compliance dates. Tier 1 institutions may therefore begin collecting data as early as July 18, 2024. As always, if you have any additional Section 1071 questions, feel free to reach out to us on the Hotline!
OCC Highlights Key Risks in the Banking System
A “maturing economic cycle may cause consumer headwinds,” and increased credit and operations risks for banks, the OCC recently said. The OCC recently released a report concluding that while the overall condition of the federal banking system remains sound a maturing economic cycle may cause consumer difficulties. Banks need to continue identifying material risks and their interconnected impacts. Continuous risk management improvement remains key.
The OCC highlighted credit, market, operational, and compliance risks as the critical consideration in its report. First, credit risk is rising. Commercial real estate sectors are experiencing stress due to a higher rate of environmental and structural changes. Office and multifamily loans, particularly those with interest-only terms, set to refinance over the next three years pose additional risk. Inflation and elevated interest rates may increase consumer financial stress in some households and weigh on overall consumption growth.
From a market risk perspective, net interest margins are under pressure due to intense deposit competition. The future direction, timing, and extent of rate movements and uncharted depositor behavior present risk management challenges. Operational risk is also elevated. Cyber threats continue to target the financial services industry and their critical service providers with ransomware and other attacks. Increasing digitalization, new and innovative product and service adoption, and third-party use increase bank operating environment complexity, creating opportunities and risks. Continued check and wire transfer fraud and increased payment fraud incidents underscore fraud risk management’s importance.
Banks operate in a constantly shifting environment because of changing customer needs and preferences related to products, services, and delivery channels. Risks are compounded if products and services, including changes, are not delivered or implemented fairly and equitably. It remains essential for banks to maintain a compliance risk management framework that is commensurate with their risk profiles and capable of growing and evolving as their risk profiles change. Fraud continues to be a significant risk for banks. Effective processes to prevent, identify, and promptly file suspicious activity reports on fraudulent activity remain essential to protect both banks and consumers.
The report highlights the necessity of firmwide resilience efforts due to interconnected risks. Events could simultaneously affect multiple risk categories. Banks must establish an appropriate risk culture that identifies potential hazards, particularly before times of stress. Prudent planning from a firmwide perspective can enhance a bank’s ability to maintain operations, remain financially sound, and service customers in times of stress. If you need any assistance planning for these risks, Compliance Alliance has an Economic Headwinds Toolkit designed to tackle all of these aforementioned risks. It provides tools and articles on:
- Asset-Liability Management;
- Allowances for Credit Losses/CECL & Credit Risk/Concentration Risk;
- Investment Risk;
- Capital Requirements;
- Asset Management;
- Fraud Mitigation;
- Physical Security; and
- Internal Controls
The Compliance Alliance team will continue to update the Economic Headwinds Toolkit to meet your needs as circumstances evolve. If you have any specific questions, please feel free to reach out to the Compliance Hub Hotline.