Clearing the Docket
A brief look at recent court decisions related to the CRA, the CFPB's prepaid rule, and Fed master accounts
This long weekend has featured an unusual number of potentially significant legal developments in litigation against the federal banking regulators and the CFPB. This post looks at four decisions issued over the past 48 hours.1
Community Reinvestment Act
Late Friday night Judge Kacsmaryk in the U.S. District Court for the Northern District of Texas issued an opinion and order imposing a preliminary injunction against the federal banking regulators. The order prohibits the agencies from enforcing the Community Reinvestment Act overhaul they finalized last year pending a final resolution of the lawsuit.
In making this ruling, the court concluded for the following reasons that the groups challenging the rule have a substantial likelihood of succeeding on the merits of their challenge.2
Entire Community
The text of the CRA requires banks to meet the credit needs of their “entire community.” Under the finalized CRA rule, the federal banking regulators’ Retail Lending Test would assess a bank’s3 retail lending in (1) facility-based assessment areas (i.e., those areas where a bank maintains deposit-taking facilities), (2) retail lending assessment areas (i.e., areas where a bank has concentrations of retail lending outside of its facility-based assessment areas) and (3) outside retail lending areas (i.e., the nationwide area outside of facility-based or retail lending assessment areas where the bank engages in retail lending).
The trade groups challenging the rule argue that by looking to areas outside of a bank’s physical location(s) the federal banking regulators have exceeded their authority under the CRA statute. The regulators respond that “entire community” means all geographic areas where a bank serves its customers, even if those geographies are not tied to a physical location.
The court held that the trade groups have the better of this argument. It described as “indisputable” that the word community “necessarily involves a limited geographic area.” And in the court’s view the fact that the CRA statute refers to an entire community does not change that.
In modifying “community,” the word “entire” merely clarifies that the whole community must be served — it does not change what a “community” is. If a statutory “community” is created around every individual customer with whom a bank does business — regardless of whether that customer is within the geography of the bank’s physical presence — the term becomes meaningless and the statute ineffectual.
The court also concluded that a provision of the CRA related to banks that serve the military (12 USC 2902(4)) supports the trade groups’ argument. That provision allows a bank whose business focuses on “serving the needs of military personnel who are not located within a defined geographic area” to define as its entire community “its entire deposit customer base without regard to geographic proximity.” The court wrote:4
In other words, if a bank primarily serves customers not clustered near its physical facility — e.g., military personnel stationed across the globe — then it can “define its ‘entire community’” pursuant to wherever its customers happen to be. But not otherwise. See Baptist Mem’l Hosp. - Golden Triangle, Inc. v. Azar, 956 F.3d 689, 694 (5th Cir. 2020) (“[T]he canon of Expressio Unius Est Exclusio Alterius . . . provides that ‘expressing one item of [an] associated group or series excludes another left unmentioned.’”).
Finally, the court dismissed the banking regulators’ arguments to the extent they relied on legislative history, saying that whatever value legislative history may have as a general matter, there is no need to look to it here because the text of the statute itself is clear.
Deposit Products
The text of the CRA statute requires an assessment of whether a bank is meeting the “credit needs” of its community.
The trade group plaintiffs in this case argue that because the new CRA rule would as part of its assessment of a bank’s5 performance evaluate the bank’s provision of retail deposit products and services, the federal banking regulators have exceeded their statutory mandate. In the plaintiffs’ view, Congress made a clear distinction between credit and deposits, and the CRA statute is concerned only with the former.
The regulators argue in response, as they did throughout the preamble to the final rule, that evaluating deposit activities is appropriate in determining whether a bank is meeting the credit needs of its community, pointing to “various common sense ways that deposit products and services help individuals access credit.”
Here again, the court concluded that plaintiffs have the better of the argument. Regardless of any rational relationship or nexus between deposit products and credit access, the court believes that the CRA statute permits only a consideration of credit products.
The question is not whether the FBAs “have articulated a rational relationship” between deposit products and the ability to access credit. ECF No. 67 at 34. It is not whether “a sufficient nexus” exists. Id. at 37. Nor is it whether the FBAs’ evaluation of deposit products is a good idea. The question is whether Congress authorized the FBAs to do so. The totality of the statutory text weighs in the opposite direction.
Congress expressly stated that “the convenience and needs of communities include the need for credit services as well as deposit services.” 12 U.S.C. § 2901(a)(2) (emphasis added). It did not forget about them. Yet in every operative provision, Congress specified that only credit need be considered. See, e.g., 12 U.S.C. §§ 2903(a)(1); 2903(b); 2906(2)(A)–(D). Hence, the inescapable conclusion is “that Congress considered the unnamed possibility and meant to say no to it.” Barnhart v. Peabody Coal Co., 537 U.S. 149, 168 (2003); Gulf Fishermens Ass’n v. Nat’l Marine Fisheries Serv., 968 F.3d 454, 466 (5th Cir. 2020). Whatever weight is assigned the FBAs’ alleged “nexuses,” it cannot “overcome the clear contrary indications of the statute[.]” S.E.C. v. Sloan, 436 U.S. 103, 117 (1978).
Major Questions
Next, in a section of the opinion that it is not clear to me was necessary, given what already had been said above, the court found that the major questions doctrine also cuts against the federal banking regulators’ position.
[A]n agency must “point to clear congressional authorization” when “the history and the breadth of the authority that the agency has asserted, and the economic and political significance of that assertion, provide a reason to hesitate before concluding that Congress meant to confer such authority.” W. Virginia, 597 U.S. at 721 (citing Food & Drug Admin. v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 160 (2000)).
Here, the “breadth of authority” that Defendants assert is substantial. See United States v. Philadelphia Nat. Bank, 374 U.S. 321, 329 (1963) (recognizing that the “power of federal bank examiners” is “perhaps the most effective weapon of federal regulation”). Never before have the FBAs claimed authority to assess banks wherever they conduct retail lending. ECF No. 73 at 16. On the contrary, they have — since 1978 — limited themselves to areas surrounding deposit-taking facilities. Id. at 16–17; 43 Fed. Reg. 47144, 47144 (Oct. 12, 1978); Interagency Questions and Answers, 57 Fed. Reg. 10899, 10899 (Mar. 31, 1992)
The court also observed in this section that bills have been introduced in Congress that would have expressly required the agencies to adopt an approach to assessment areas similar to what is required for some banks in the revised CRA rule. Those bills did not go anywhere, and in the court’s view this further undercuts the regulators’ assertion of authority.
***
It is not clear what will come next or what the final outcome will be. Rulings by Judge Kacsmaryk — the only federal judge who sits in the U.S. District Court for the Northern District of Texas, Amarillo Division — have not always held up on appeal.
While they will likely be cautious about commenting too much on ongoing litigation, note that next week is NCRC’s Just Economy Conference, with appearances scheduled from Vice Chair for Supervision Barr, Chairman Gruenberg, and Acting Comptroller Hsu.
CFPB Prepaid Rule
In 2019 PayPal sued the CFPB over provisions of the prepaid card rule the agency finalized in 2016 (but then delayed and further amended in 2018). PayPal argued that various provisions of the rule as applied to PayPal’s digital wallet product exceeded the agency’s statutory authority.
In 2020, District Judge Richard J. Leon ruled in favor of PayPal on two points. First, Judge Leon concluded that by adopting certain model clauses to be used in short-form disclosures, the CFPB had exceeded its statutory authority under the Electronic Fund Transfer Act. Second, Judge Leon concluded that the CFPB had exceeded its statutory authority under the Truth in Lending Act by imposing certain restrictions on when a consumer could link credit to their digital wallet. Because he found in PayPal’s favor on these arguments, Judge Leon did not reach other challenges to the rule raised by PayPal.
The CFPB appealed the part of this ruling relating to short-form disclosures, and in February 2023 the D.C. Circuit reversed. In an opinion by Judge Rao, the court concluded that the prepaid rule’s short-form disclosure requirements do not in fact require the use of mandatory model clauses and therefore do not violate EFTA’s prohibition on mandatory model clauses (assuming there is such a prohibition6).
Judge Rao ended her opinion by saying that the issue before the D.C. Circuit was a “narrow” one and that when the case returned to the district court PayPal was free to continue raising other challenges to the short-form disclosure requirements in the prepaid rule as applied to digital wallets.
Back before Judge Leon, PayPal did just that. It argued that the short-form disclosure requirements in the rule, at least as applied to digital wallets, (1) are arbitrary and capricious under the Administrative Procedure Act, (2) are “doubly arbitrary and capricious” because the CFPB disregarded its duty under Dodd-Frank to assess costs and benefits7 and (3) violate the First Amendment by requiring PayPal to disclose information that is inapplicable to its digital wallet product and that is misleading to consumers.
On Friday, Judge Leon again ruled in favor of PayPal, concluding that the CFPB had indeed acted arbitrarily and capriciously.8
First, Judge Leon found that the CFPB lacked a rational justification for subjecting digital wallets to the prepaid rule’s short-form disclosure requirement in the first place. In Judge Leon’s view, the agency fell “well short” of the APA’s requirement for reasoned decisionmaking when it “cavalierly dismiss[ed]” differences between digital wallets and other types of prepaid products subject to the rule. At various points in this section of the opinion, the CFPB’s analysis is called, among other things, “circular,” “senseless and badly speculative,” and “conjecture” that seeks to “masquerade as a predicate for rational agency action.”
Second, and an additional reason for concluding the CFPB’s short-form disclosure requirement as applied to digital wallets is unlawful, is what Judge Leon sees as the CFPB’s deficient cost-benefit analysis. In Judge Leon’s view the CFPB “gave almost no consideration at all” to the potential costs and benefits of applying the short-form disclosure requirement to digital wallets — a “glaring omission” that “only adds to the pile of reasons for vacating” this provision of the rule.
To Judge Leon it is no answer to this objection for the CFPB to say that it considered costs and benefits generally, even if it did not consider them as applied to specific products.
Perhaps recognizing its deficiencies on this front, the CFPB next insists that it had no obligation, period, to "separately discuss the benefits anu costs of applying [the] rule to each specific type of product that the rule covers." CFPB Mot. 28. Instead, it was entitled to rely on a "general" cost-benefit analysis that "appl[ies] fully" to each covered product to fulfill its obligations under the Act. . . .
But while that might be true in other cases, it is not true in this one. For starters, the forty-page "general" analysis on which the CFPB relies, ARl 577-614, does not "apply fully" to digital wallet products, Huntco, 240 F. Supp. 3d at 222. Most of it does not apply at all. The only part of that cost-benefit analysis that arguably rings true for digital wallets is the few pages discussing how web-based providers should deliver the mandated disclosures. See ARI 589-590. But the CFPB undercuts its own analysis on this score by admitting, in conclusion, that it never "test[ ed] the disclosure regime in an electronic setting." ARl 589. That is surely not the kind of rigorous assessment that Congress contemplated for Dodd-Frank rulemakings, even if it does apply to digital wallets.
Judge Leon concludes his opinion by saying that when seeking to impose a “prescriptive and burdensome disclosure regime on a nascent and fast-evolving financial product,” the CFPB needed to offer some sort of rational connection between the facts and the rule it adopted, as well as some sort of assessment (quantitative or qualitative) of the costs and benefits of the regulation.
Instead, in Judge Leon’s view, the CFPB “tried to solve an imaginary problem with no real evaluation of what that ‘solution’ would cost digital wallet providers or consumers.” He shouts:
Administrative arrogance of this magnitude is hardly deserving of judicial imprimatur!
The court therefore vacated the short-form disclosure requirement as applied to digital wallets. Other provisions of the rule will remain in effect.
***
I cannot honestly claim to have followed the ins and outs of the CFPB’s prepaid rule, whether applied to digital wallets or otherwise. So this is not the place to make grand pronouncements about what this opinion does or does not mean (or whether it will even be upheld on appeal, should the CFPB choose, again, to appeal). But I think the opinion is at least relevant for the following points:
One, I’d expect Judge Leon’s language about the hurdles the CFPB faces when trying to regulate “nascent and fast-evolving financial product[s]” to be trotted out in challenges to CFPB and other agency actions for years to come.
Two, while it certainly makes sense for the CFPB to prefer to have challenges against its actions heard in D.C as opposed to say, the Amarillo or Fort Worth Divisions of the Northern District of Texas, litigating in D.C. is no guarantee of success.
Custodia Master Account Litigation
Also on Friday, the United States District Court for the District of Wyoming ruled that Custodia is not entitled to a master account. In the court’s view, the relevant statutes provide the Federal Reserve Banks with discretion as to whether to grant master accounts to eligible institutions and do not, as Custodia argued, require that master accounts be granted to every eligible institution that applies for one.
There will be plenty of focus elsewhere on the merits of Judge Skavdahl’s ultimate conclusion, but setting the conclusion aside for now I thought there were at least two interesting things about how the court got there.
Toomey Amendment
The court in its opinion Friday acknowledged a previous Tenth Circuit decision in a 2017 case involving a master account request from Fourth Corner Credit Union. That case produced a three-way split decision, with one judge, Judge Bacharach, concluding that the law requires the Reserve Banks to grant master accounts to all eligible institutions.
Because Fourth Corner was a split decision, Judge Bacharach’s opinion is not controlling in the Custodia litigation, and Judge Skavdahl explained that he chose to “respectfully deviate[]” from it “based in large part on certain legislation enacted by Congress since then, which was not available for Judge Bacharach’s consideration in 2017.” Later, the court explained:
[C]oncluding the Federal Reserve Banks possess discretion to grant or deny master accounts is harmonious with recent federal legislation. In December 2022, as part of the National Defense Authorization Act for Fiscal Year 2023, Public Law 117-263, Congress enacted and the President signed into law 12 U.S.C. § 248c. That statute instructs the Board of Governors to create and maintain a public database identifying every entity that currently possesses a master account at a Federal Reserve Bank as well as every entity that has submitted an application for a master account. 12 U.S.C. § 248c(b)(l). Significantly, the Board's database must also show whether each new master account application "was approved, rejected, pending, or withdrawn." Id. § 248c(b)(l)(B)(ii).
If Congress intended the DIDMCA to remove a Federal Reserve Bank's discretion to deny a master account application, there would be no reason for Congress to now require a public database indicating which master account applications have been granted and which have been denied.
Former Senator Toomey, who authored this provision, had earlier filed an amicus brief urging the court “to reject attempts, by the Board and Kansas City Fed, to interpret the Amendment as any indicia of congressional intent to support the existence or scope of any discretion to reject master account applications.” That briefing evidently proved unpersuasive.
This would be an interesting enough development on its own, as Senator Toomey’s amendment has now, contrary to its author’s intention, been held by at least three different courts to support the arguments made by the Federal Reserve Board and the Federal Reserve Banks in favor of confirming that the Reserve Banks have discretion over master account applications.9
What makes this really interesting, though, is that as pointed out by Eleanor Terrett on X, earlier in the Custodia litigation Judge Skavdahl cast doubt on this same argument. In a June 2023 order denying in large part a motion to dismiss the case, Judge Skavdahl wrote (emphasis mine):
The Board of Governors relies on this new statute in part to advance its statutory interpretation argument, but the Court is not convinced. Section 248c requires the Board of Governors to create and publish a public database that identifies every entity currently with access to a Federal Reserve master account and every entity that has applied for a master account along with whether the request was approved, rejected, pending, or withdrawn. 12 U.S.C. § 248c(b ). The Board of Governors argues that because § 248c requires a public list of any "rejected" master account applications, whether to grant such an application must be discretionary. (ECF 127 pp. 31-32.) The Court does not see it so cut-and-dried. It is public knowledge that master account applications have been "rejected" or denied for non-discretionary reasons in the past. For example, in Fourth Corner, the district court dismissed the credit union's lawsuit after determining FRBKC could not have issued a master account in that case because doing so would have aided the credit union in providing banking services to marijuana-related businesses, which would have violated federal drug laws. Fourth Corner, 861 F .3d at 1053-54 (Moritz, J. ). Thus, at the time Congress passed§ 248c, it was known that Federal Reserve Banks had "rejected" master account applications in the past, but § 248c cannot be read as Congress' imprimatur on Federal Reserve Banks holding carte blanche to grant or deny master account applications. (See ECF 151 pp. 12-14, 17-18.) Section 248c does not, expressly or impliedly, carry the statutory construction load the Board of Governors asserts it does.
It’s fine (good even) for a court to change its mind, particularly between a preliminary stage in a case and a later stage when more facts have been developed. But it’s a little weird for a court to change its mind without explaining what caused the change in mind, particularly where, as here, it’s not clear that any facts actually have changed in the interim — the statute says the exact same thing in March 2024 as it said in June 2023.
Elephants in Mouseholes
The Supreme Court said in 2001 that it presumes that Congress does not “hide elephants in mouseholes.” This statement sometimes features in challenges to agency regulation, including recent challenges that have sought to invoke the major questions doctrine.
In this case, though, the court explains that this canon of statutory interpretation cuts the other way, and actually supports the Reserve Banks’ position.
The Defendants' briefing described the Federal Reserve Banks' exercise of discretion in granting access to accounts and services dating back to the Federal Reserve Act of 1913. (ECF 271 pp. 17-21; ECF 273 pp. 14-16.) Accepting Custodia's contention here would mean that Congress, in the DIDMCA in 1980, greatly altered the details of the regulatory scheme first initiated in 1913 by requiring Federal Reserve Banks to provide master accounts to all eligible depository institutions requesting one, and also that Congress did so in a provision (and a subchapter) directed at the Board of Governors and without expressly saying as much. A better example of hiding an elephant in a mousehole would be difficult to find. The Court finds it highly unlikely that Congress intended such a significant change in the Federal Reserve Banks' procedures, not to mention the access to the national banking system, via such implicit terms in a statute directed at a different entity.
PayServices Master Account Litigation
The Custodia master account litigation against the Board and the FRBKC has received more attention, but there is a separate, similar challenge being brought by PayServices Bank against the Federal Reserve Bank of San Francisco. (The background is fairly interesting, and was discussed in more detail previously here.)
Whether by coincidence or otherwise, one day after Judge Skavdahl in Wyoming issued his opinion in the Custodia case, yesterday Magistrate Judge Patricco in the District of Idaho issued an opinion in the PayServices litigation.
For much the same reasons as in the Custodia opinion (including but not limited to the 2022 Toomey amendment discussed above), the opinion concludes that the FRBSF has the discretion to deny requests for master accounts.
That alone would be enough to decide the case, but the court goes on to explain that PayServices’s case against the FRBSF would fail for various other reasons, including that in the court’s view the FRBSF is not a federal agency for purposes of the Administrative Procedure Act. Instead, the court believes that for APA purposes “Federal Reserve Banks are more accurately described as private corporations, owned by their member commercial banks.”
***
Decisions from the District of Wyoming are appealed to the Tenth Circuit, while decisions from the District of Idaho are appealed to the Ninth Circuit. So any appeals of these respective decisions10 would be heard by different courts of appeal.
Also interesting but not covered in this post is whatever is going on with the challenge to the CFPB’s credit card late fee rule, where on Saturday morning the Fifth Circuit issued an order staying until Tuesday at 5 p.m. the transfer of that case from a District Court in Texas to the District Court in Washington, DC.
People smarter than me seem unsure about what this means or how this is going to work given that (according to the docket in D.C. at least) the case has already been transferred.
Not discussed in this post, but the court also found that the other preliminary injunction factors weigh in favor of the plaintiffs.
“Bank” is used here for shorthand but that oversimplifies. Certain provisions of the new rule apply only to “large banks,” and in some cases only to a certain subset of large banks. See the regulators’ brief in opposition at page 5 (“Based on historical data, the FBAs estimate that the requirement to delineate RLAAs would have applied to only 63 large banks if it had been in effect from 2018 to 2020”).
Both the plaintiff trade groups and the federal banking regulators cited to this provision in their briefing. The court did not adopt this view but for what it is worth the regulators argued this provision in fact supports their position:
[T]he provision establishes that for institutions serving military personnel, the bank’s “entire community” may not be a geographic area, but rather may consist of its customers without regard to any of their geographic locations. Id. This leads to the natural conclusion that, for all other institutions, the term “entire community” must encompass the geographic locations of the bank’s customers. . . . Thus, while the performance of an institution serving the needs of military personnel (who may be stationed abroad, deployed in combat zones, etc.) is not required to be evaluated in the geographic locations of their customers, the Final Rule continues to require evaluation of performance in customers’ geographic areas for other banks (similar to the rule already in place).
Here again “bank” is used for shorthand but not all banks are subject to this assessment.
The court noted that for purposes of the litigation PayPal and the CFPB proceeded on the assumption that EFTA does in fact prohibit the CFPB from requiring the use of specified model clauses.
The legal question presented on appeal is a narrow one. The CFPB does not dispute, for the purposes of this case, that it lacks the statutory authority to issue mandatory model clauses. Oral Arg. Tr. 9:3–10. Rather, the CFPB maintains the Prepaid Rule does not in fact impose mandatory model clauses. In response, PayPal argues the Rule effectively imposes mandatory model clauses for which the CFPB has no authority under either EFTA or Dodd-Frank.
In a footnote, Judge Leon said he was not sure (1) and (2) are appropriately viewed as distinct arguments, given that both “essentially boil[] down to the same (or similar) questions we ask under the APA.” Therefore Judge Leon said he would address “both of PayPal’s arbitrary and capricious objections, even if either might independently serve as a basis for finding the CFPB’s action unlawful.”
Because he reached this conclusion, Judge Leon declined to address PayPal’s First Amendment arguments.
In addition to this decision from the District Court in Wyoming and the decision in the District of Idaho discussed below, a judge in the Southern District of New York has also adopted this view of the 2022 Toomey amendment to the NDAA.
CoinDesk quotes a spokesperson for Custodia as saying that they are “reviewing the Court’s decision and all of our options, including appeal."