Federal Court Says Consumer Watchdog Can’t Check Banks for Discrimination

A federal judge in Texas ruled that the Consumer Financial Protection Bureau is overstepping its bounds in its attempts to check whether banks and other financial firms are discriminating against Black Americans and other minorities.

The case was brought last year by big trade organizations, including the U.S. Chamber of Commerce and the American Bankers Association. On Friday, the judge, J. Campbell Barker, wrote in his ruling that the consumer regulator was “exceeding statutory authority” in its attempt to use a law that bars financial institutions from engaging in “unfair, deceptive or abusive acts or practices” to check for instances of discrimination during routine examinations of the firms.

State laws offer protections from discrimination, and the C.F.P.B.’s activities would get in the way of those, wrote the judge, who was appointed by former President Donald J. Trump. He also said that the law the C.F.P.B. wanted to apply in its new checks for discrimination, passed after the 2008 financial crisis, did not specify discrimination. Therefore, the phenomenon was outside its scope.

In fact, not every state has its own anti-discrimination laws. Georgia, for instance, does not broadly prohibit private employers from discriminating against employees nor private businesses from discriminating against customers.

“The agency instead must point to clear congressional authorization for the power it claims,” the judge wrote, citing a Supreme Court ruling that last year limited the Environmental Protection Agency’s ability to regulate emissions under the Clean Air Act.

Sam Gilford, a C.F.P.B. spokesman, said in an email that the agency was considering appealing.

“A longstanding and straightforward federal law prohibits unfair acts and practices, stating that financial firms cannot subject consumers to substantial and unavoidable harm,” Mr. Gilford said. “In our view, it is common sense that discrimination can meet that standard.” He added that the agency would abide by the ruling but would also continue to use “any available tool” to fight discrimination in the financial system.

Banks have long tried to limit the ways regulators can penalize them. While they say they aim to treat all customers equally, they also say that some customers may be at a disadvantage because of systemic inequality in American society for which they are not responsible.

In 2020, after George Floyd’s murder set off widespread protests against police brutality and the broadly unjust treatment of Black Americans, top executives from the major banks, including Wells Fargo and Bank of America, asked the Trump administration to hold off on their request to scrap anti-discrimination protections put in place under the Obama administration. Such a regulatory break would have seemed too out of step with public sentiment at the time, but more than three years later, the banks are getting relief on a scale similar to what they had chosen to forgo.

The trade groups behind the lawsuit had originally stressed that their main impetus for suing the C.F.P.B. was a question of process. The regulator had added “discrimination” to a manual provided to financial firms explaining how to prepare for the agency’s periodic checks on their operations. Officials should have given them more warning, the groups argued, and a chance to submit public comments on the matter before finalizing the change.

In a broader argument, the groups also claimed it wasn’t clear that the C.F.P.B. had any authority to test them for discriminatory practices. Judge Barker’s decision focused on that broader issue.

Rob Nichols, the president of the American Bankers Association, said in an emailed statement that his organization was “pleased” with the outcome of the case, adding that the ruling found that the C.F.P.B. did not have “open-ended and novel power to examine banks for alleged discriminatory conduct.”

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