Loper Bright Darkens Outlook for Regulation

Last week, the Supreme Court punched a Chevron-shaped hole in the regulatory levee. And then it gave industry interests more time to file a case. And made it harder for administrative law judges to enforce laws. A flood of litigation is coming.

Last week, a 6-3 decision in Loper Bright Enterprises v. Raimondo repudiated “Chevron deference,” a legal principle that strengthened regulators. The principle’s general idea: When there’s ambiguity over what Congress intended in a statute they’ll defer to the answer of the relevant agency – like the Environmental Protection Agency or the Securities and Exchange Commission, for example. This legal standard originated with Chevron U.S.A. v. Natural Resources Defense Council in 1984.

Now it’s been overturned. How the Loper Bright decision will play out precisely in practice remains to be seen. But some outcomes are not hard to imagine. The decision “will give judges who are already concocting ridiculous reasons to strike down sensible protections, particularly in the notoriously pro-industry Fifth Circuit, greater leeway to strike down common-sense measures that protect people and communities,” Americans for Financial Reform Education Fund writes. 

Said AFR-EF’s Patrick Woodall: 

“Dedicated lifelong agency staff, scientists, and technical experts bring decades of expertise and experience that simply cannot be adequately replaced by a federal judge, least of all the ideologically pro-industry ones that are eager to stop any and all regulations.”

Just think of regions like the Fifth Circuit, where Trump appointees have, at almost every turn, sided with corporate interests in significant cases, such as CFPB v. CFSA or the lawsuit against the SEC’s private fund advisers rule.

Said AFR-EF’s Christine Chen Zinner: “There is every reason to expect that this ruling will embolden Wall Street, predatory lenders, and other industries to litigate against even the most common-sense consumer protections.” And AFR-EF’s Andrew Park: “The end of Chevron will only make investor protections of all kinds harder to implement and keep in place.”

Indeed, The Hill calls it a “sledgehammer to federal agency power.” And Politico recognizes it will tie the hands of Biden and any future regulators. In a dissent, Justice Jackson, joined by the other two members of the high court’s liberal bloc, expected: “[a] tsunami of lawsuits that [the decision] has authorized has the potential to devastate the functioning of the federal government.” 

Graham Steele, the former assistant Treasury secretary for financial institutions in the Biden administration, predicted a greater emphasis on enforcement as a result of Loper Bright: “That is one irony of this whole effort,” he said. “This could actually lead to regulation by the agencies being more opaque, less transparent, and by an examiner-by-examiner basis.”

In a related legal comorbidity: The high court also gave companies more time to challenge regulations, arguing that a standing six-year statute of limitations for filing lawsuits begins when a regulation first affects a company – not when it is actually issued. 

All in all, a bad week to be a regulator.

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BANKING AND FINANCIAL STABILITY: Capital Rules – Bank Stress Test – Dumping CRE – Silvergate
CONSUMER: CFPB for Fairness – Small Business Lending – A Scam at Your Fingertips – Credit Reports – FICO Hikes
CAPITAL MARKETS: Proxy Firms – In-House Courts – The SEC and SROs
PRIVATE MARKETS: Private Equity and Inflation – Discover Loans – Rare Legal Action – KKR Moves In – Other Private Markets News
CRYPTO: FOIA’d – Another Crypto Bill – Consensys – Binance
HOUSING: Utility Bills – AI-ppraisals – Freddie’s Program Pilot – Waters’ Housing Bills
CLIMATE AND FINANCE: Priced Out by Fire – Climate Homicide
POLITICS AND MONEY: Crypto Cash

Feedback? Reach us at afrnews@ourfinancialsecurity.org

BANKING AND FINANCIAL STABILITY

Capital Rules.

The Fed appears likely to water down the Basel III Endgame, a set of provisions that would push the country’s largest banks to hold more capital in order to provide a financial system safety cushion, despite reported resistance to delaying the critical rule from the FDIC and OCC. While the original proposal, floated about a year ago, would have resulted in an average 16% increase in how much capital large banks would have to hold, people close to the matter suggest that the Fed would walk back these critical capital improvements and only increase requirements by as little as 5%.

Bank Stress Test.

According to the latest Fed bank stress tests, while 31 of the country’s large banks remain “well positioned to weather a severe recession,” they would have encountered greater losses this year compared to last. The reasons, the Fed suggests: banks’ credit card balances going up while delinquency rates do the same; riskier corporate credit portfolios as banks downgrade their own loans; and higher expenses coupled with lower fee income. But, since they ultimately passed, higher shareholder payouts and more buybacks are coming.

Related: The stress test also revealed that the proposed Capital One-Discover merger, which would create the largest credit card issuer in the country, would also increase systemic risk. An adverse scenario could erode a combined Capital One-Discover credit portfolio by $53.6bn. On its own, Cap One is already weighed down by credit loans, and both companies had much higher credit card delinquency rates than the average of the 100 largest banks. The merger could substantially destabilize the financial system during significant economic downturns. Said AFR’s Patrick Woodall:

“The banking agencies should block the proposed Capital One-Discover merger to prevent the creation of another too-big-to-fail bank that today’s stress-test shows poses an increasing risk to the financial system and the broader economy … Adding Discover’s massive credit card lending to Capital One’s already overweight credit card portfolio could substantially destabilize the financial system.”

Dumping CRE.

Banks don’t want to hold onto commercial real estate (CRE) loans anymore. Projected losses are mounting amid high interest rates and vacancy rates. CRE sell-offs are ramping up as “banks are looking to shrink exposures,” according to S&P Global Market Intelligence. A recent report indicated that $37bn in CRE loans were delinquent – a little over 1% of all loans held by banks. And nearly two-thirds of these loans are on the balance sheets of small banks. 

Silvergate.

The SEC has levied civil charges related to misleading investors against execs at Silvergate, one of the banks that toppled during 2023’s banking crisis.

CONSUMER 

CFPB for Fairness.

The CFPB released its Fair Lending Annual Report to Congress, detailing how the agency took numerous actions against unlawful discrimination and promoted access to fair credit in 2023. One highlight: action against repeat offender Citibank for illegal discrimination against Armenian-Americans seeking credit cards. 

Small Business Lending.

The CFPB’s small business data collection rule, which would require financial institutions to submit data related to how they lend to women-owned, minority-owned and small businesses, is back on track now that the agency has won its SCOTUS battle. Previously, a federal court in Texas issued an injunction pending a high court ruling. Now that the case is over, the CFPB has extended its compliance deadline by 290 days – the same amount of time between the stay and the legal victory.

Related: Despite the importance of these disclosures in combating lending discrimination, the House Farm Bill exempted farm credit system lenders from reporting farm lending data under the rule that is critical in documenting longstanding problems accessing credit for Black, Latine, Native, Asian, women, and young farmers.

A Scam at Your Fingertips.

A pro-corporate, right-wing nonprofit – the American Legislative Exchange Council (ALEC) – is pushing a bill through state legislatures that would create industry-friendly regulations for earned-waged advance (EWA) providers at the expense of consumers. EWA, also known as workplace payday loans, let workers access their paychecks early, though in many cases the provider charges fees to do so. This extra financial burden warps the service into something resembling predatory payday loans, which have historically hurt low-income communities the most. The language circulated by ALEC would exclude EWA from being considered a form of credit or a loan. Said AFR’s Christine Chen Zinner:

“I like to think of these as workplace payday loans…There’s an expectation to be repaid, there’s a consequence if they aren’t repaid, so it’s really a loan…In many ways, it’s even more dangerous than going into a payday lender [store], now it’s accessible on your phone, which means all those predatory practices are easier to access and [consumers are] more quickly to be preyed upon.”

Credit Reports.

An industry-centric article from American Bankers suggests that a wave of consumers filing cases which allege violations of the Fair Credit Reporting Act has overwhelmed financial institutions and credit agencies. Between January and May, 2,744 lawsuits were filed, including those from so-called “repeat filers.” The industry claims the rash of litigation comes from a “cottage industry” of credit repair companies, which they claim encourage sending falsified reports. Worth noting: A Consumer Reports investigation back in 2021 found that over a third of consumers found actual mistakes in their credit reports, and a more recent article points to errors on the part of the credit bureaus and their use of automated systems for the surge in credit report error complaints. 

FICO Hikes. 

FICO scores are a major determinant of whether consumers can get loans, including home mortgages, and lenders pay for those scores. Lawmakers are now calling for investigations into FICO, as the cost to obtain a score has increased 500 percent in two years. Lenders are required to obtain a score in order to sell to Frannie Mae and Freddie Mac, which back half of the mortgage market.

CAPITAL MARKETS

Proxy Firms.

The Fifth Circuit has tossed a substantial part of an SEC rollback of Trump-era constraints on proxy firms. Under Trump appointee Jay Clayton, the SEC directed proxy firms – meant to independently help shareholders understand and navigate board proposals – to provide their voting advice to both their clients and to companies. In 2022, the SEC removed the requirement, hoping that investors would be able to get timely and independent advice. The decision drew a lawsuit from the National Association of Manufacturers. Now, the Fifth Circuit says that the SEC violated agency procedure law. 

In-House Courts.

In a pro-corporate decision, the Supreme Court ruled against the SEC in SEC v. Jarkesy, a case examining whether the agency was allowed to conduct in-house securities laws trials using administrative law judges who have specialized expertise in the agency’s regulatory issues. The 6-3 decision stripped the SEC of one of its “key enforcement powers,” used to pursue cases like fraud and insider trading. Justice Sotomayor issued a strong dissent, calling the decision part of a “power grab” in “further dismantling of the ‘administrative state’.” Said AFR’s Andrew Park: “Over a hundred cases a year now will be transferred from a tribunal presided over by actual securities experts, to a court that may not be impartial or fair.” 

The SEC and SROs.

The Healthy Markets Association (HMA) called on the SEC to revise its rules surrounding Self-Regulatory Organization (SRO) fee filings in order to better protect investors. SEC rules direct SROs, like national securities exchanges including the New York Stock Exchange, to file changes to their rules and fees with the agency. These organizations, however, have “increasingly flouted and even abused ‘effective on filing’ privileges to inflate fees for market data and connectivity, often without any basis or justification.” 

PRIVATE MARKETS

Private Equity and Inflation. 

A major cause of inflation is private equity, argues columnist Darrell Berkheimer. He notes that as private firms increase their control over homes, hospitals, and many companies, they often raise prices of all kinds. 

Discover Loans.

Carlyle and KKR clinched a joint bid to take over a $10bn portfolio of student loans from Discover Financial, marking one of the largest loan portfolio sales of the year. The purchase comes after credit issuer Discover agreed to merge with financial services company Capital One (Discover is shedding its student loan portfolio after an FDIC consent decree over longstanding problems with its treatment of student borrowers; the consent decree is purported to have helped pave the way for the Capital One takeover.) 

Rare Legal Action. 

A California speech therapist company is suing its legal representation over alleged breach of fiduciary duty, claiming they failed to secure proper compensation as Carroll Capital, of former KKR executive Brian Carroll, took over their business. Lawsuits involving parties of a PE transaction aren’t common, but after requesting that they keep operational control of the business, the founders of the therapist company ended up with only 40 percent compared to Carroll’s 60 percent. 

KKR Moves In.

Already a player in the residential sector, the private equity megafirm KKR recently paid $2.1bn to scoop up more than 5,200 apartments across the country. Investors expect that this purchase and other similar ones mean that rents will continue to rise, despite already burdened tenants. 

Other Private Markets News.

Debt vs. Equity.  Investments in private credit strongly outperformed investments in private equity, according to WSJ. High interest rates make it hard for buyout firms to exit their investments, while private credit funds can charge higher rates on the loans they make.

Tort Firms. Private equity firms have descended upon law firms in Arizona, where laws around law firm ownership are more lax. Of particular interest are mass tort firms, which have increasingly leaned on “alternative business structures,” like PE ownership. 

Market Data on the Private Market. BlackRock will purchase the alternatives market data firm Preqin for $3.23bn. Larry Fink hints that the purchase might lead to private markets being indexed. 

Cardiology. Private equity’s growing presence in the cardiology sector has raised concerns over quality of care and patient outcomes. 

CRYPTO

FOIA’d.

The crypto exchange Coinbase sued the SEC and FDIC after the agencies rejected Freedom of Information Act (FOIA) requests related to their regulation of digital assets. Coinbase has been at the center of numerous crypto-oriented lawsuits, like when it sued the SEC last year over what the exchange perceived to be a lack of specifically carved-out crypto rules. The company is also the defendant in an SEC case over alleged securities law violations. 

Another Crypto Bill.

Republican Sen. Vance has entered the crypto fray with a draft bill seeking to revamp the framework of U.S. digital asset regulation. Vance, who is angling to be a crypto-friendly Trump VP nominee, would reportedly be even more industry-friendly than the Republican-led House crypto bill that passed last month. Like its counterparts, the bill would split regulatory authority between the SEC and CFTC, undermining the former’s authority to police what investor advocates say are best treated as securities. 

Consensys. 

The SEC continues to try and curb predatory crypto firms, suing Consensys for selling unregistered crypto securities and operating as an unregistered broker. In April, Consensys sued the SEC over its claim to authority over world's second-most valuable digital asset, Ether.

Binance.

Last week, a federal judge decided that the crypto exchange Binance must face the majority of the complaints levied against them in a lawsuit from the SEC. The agency previously accused the firm and its chief Zhao of artificially inflating trading volumes, inappropriately diverting customer funds, misleading investors and failing to restrict U.S. customers from its platform. Zhao received prison time for violating anti-money laundering laws. 

HOUSING

Utility Bills. 

A Biden administration rule that requires new homes to meet higher energy efficiency standards to qualify for federal loans has come under industry attack. Republican lawmakers are attempting to block the rule, saying it raises home prices. The rule, however, is another measure taken by the administration to combat climate change and bring down utility costs which are soaring due to higher temperatures in the summer. It is estimated that it saves $2 billion on energy. Industry lobbyists have listed a repeal of the rule as a top priority.

AI-ppraisals.

A new rule from the CFPB seeks to ensure the accuracy and accountability in mortgage lenders’ use of artificial intelligence and algorithms to issue home valuations. Recognizing that the technology can perpetuate or amplify bias, the agency requires companies to implement safeguards to promote a high level of confidence in the judgements, protect against data manipulation, avoid conflicts of interest and comply with nondiscrimination laws.

Freddie’s Program Pilot. 

The Federal Housing Finance Agency has given conditional approval for Freddie Mac’s second-mortgage pilot program. The program allows Freddie to purchase second mortgages (which for some have become “zombie mortgages”) in an attempt to help homeowners afford housing amid record prices and low sales. 

Waters’ Housing Bills. 

During a House Financial Services Committee hearing, Congresswoman Waters called on the adoption of three bills to help address the housing crisis. One bill would create millions of accessible homes, another would end homelessness, and another would establish a grant program for qualifying assistance to first generation homebuyers. The bills come amidst a growing housing and rent crisis.

CLIMATE and FINANCE

Priced Out by Fire. 

A 2018 fire in California sparked by faulty PG&E equipment burned down several towns in the state. One survivor was days away from having her landlord sign the property title over to her after renting for twenty years. The cost of housing has now reached a point where she cannot afford any other home in the area. The situation is a potential foreshadowing of the housing market as wildfires, hurricanes, flooding and storms exacerbated by climate change pose a greater threat to housing stability for low-income and low-wealth individuals who are grappling with affordability and safety. 

Related: As temperatures continue to rise, the housing crisis becomes life or death for many. Homes with air conditioning can be too expensive for some to buy, and while affordable housing generally has air conditioning, it can be too expensive for many to pay their energy bills. The Department of Housing and Urban Development has issued a provision that allows public housing residents to ask the government to pay their AC bills during periods of extreme heat. 

Climate Homicide.

Public Citizen created a “prosecution memorandum” that explores how officials in one Arizona county could levy criminal charges against fossil fuel companies for the hundreds of lives lost in a July 2023 heatwave in the American Southwest, due to their role in propelling the climate crisis. 

POLITICS and MONEY

Crypto Cash.

As crypto seeds its influence with cash on the Hill and in races across the country, Public Citizen’s Robert Weissman warns against allowing the industry’s political machine to “purchase new rules and regulatory legitimacy.” 

Related: A nonprofit representing Bitcoin miners, the Bitcoin Voter Project, is prepping digital advertising and social media to publicize congressional and presidential candidates’ stances on crypto issues.