Opportunity Knocks – Litigating Financial Regulation in a Second Trump Administration

During the Biden-Harris Administration, the relationship between financial institutions and their regulators chilled considerably. The financial services industry works daily with its regulators—especially through the supervisory process—and it has historically tried to avoid a confrontational approach that risked souring relations with federal regulators.

But banks and others are showing an increased willingness to challenge regulators over what they see as costly and burdensome regulation and agency overreach. For example, as described further below, the president and CEO of the Kentucky Bankers Association, in explaining its lawsuit against the Consumer Financial Protection Bureau (CFPB), stated, "We are challenging the CFPB to ensure that banks can continue to protect their customers and the integrity of the financial system in a safe and sound manner." He was joined recently by a former FDIC chair who noted that banks were no longer in an apolitical environment and that banks "have to have the backbone to fight the regulators when they think they are right." Against this backdrop, and in the wake of recent Supreme Court decisions, it appears the banking industry's cost-benefit analysis of compliance versus contention is shifting.

The prospect of a second Trump Administration adds to and complicates this overall trend. Despite election results that seem to favor industry (e.g., a deregulatory agenda and less aggressive use of enforcement actions generally for banks), we expect litigation to continue and increase in the near term because the cases have shown to be effective in securing creative relief and holding the actions of the "old guard" accountable. Moreover, new senior agency management in the next Administration may be more willing to open the door to settlement discussions.

Below, we set forth what we view as the four main grounds for potential regulatory challenges and suggest some effects that the second Trump Administration's interest in deregulation might have on the landscape of future litigation.

Bases for Regulatory Challenges

In the last several years, financial institutions challenging regulatory actions by federal agencies have focused their strategy on one or more of four interrelated issues. While typically raised in lawsuits against the regulators, these issues have also appeared in comments to proposed rulemakings, signaling the institutions' potential litigation strategy.

1. No Statutory Authority

Agencies must interpret the statutes that grant them authority when taking action, whether in a rulemaking, policy statement, enforcement action, application approval, or informal guidance. When those actions are challenged, courts review the agency's interpretation of the enabling statutes to determine if the agency has exceeded its authority. Recent litigation involving agencies' interpretations of their statutory authority have played out in different ways. Given the primary importance of statutory authority to agency action, we expect to see future litigants continue to raise statutory authority arguments in all contexts.

• SEC and crypto. In February 2024, digital asset trading platform LEJILEX and the Crypto Freedom Alliance of Texas sued the SEC, challenging its "regulation by enforcement" approach to the digital asset industry. The plaintiffs assert that the SEC is incorrect in its view that most digital asset transactions involve investment contracts under the federal securities laws. According to the complaint, LEJILEX faces a "genuine threat" that when its new digital asset trading platform launches, the SEC will bring an enforcement action claiming that LEJILEX is operating an unregistered securities exchange, broker, or clearing agency. The plaintiffs argue that the SEC's "sweeping assertion of regulatory authority" over the digital asset industry is contrary to the statutory text, history, precedent, and common sense. The plaintiffs also allege that the major questions doctrine forecloses the SEC's position because it would "radically expand the scope of its powers" and "disrupt a trillion-dollar industry," despite Congress repeatedly declining to grant the SEC the regulatory authority it now seeks.
• Open Banking and the CFPB. In October 2024, the Bank Policy Institute, Kentucky Bankers Association, and Forcht Bank, a national bank, filed suit challenging aspects of the CFPB's so-called Open Banking Rule, which governs how consumers access their financial data and how that data is protected. The CFPB issued the rule under Section 1033 of the Dodd-Frank Act. The plaintiffs allege, in part, that the CFPB exceeded its statutory authority by requiring banks to provide their customers' financial information to authorized third parties. The plaintiffs assert that Section 1033 requires banks to give consumers their own information, and although the Dodd-Frank Act generally defines "consumer" to include "an agent, trustee, or representative acting on behalf of an individual," the CFPB's rule requires data providers to share consumer information with commercial entities that do not qualify as agents, trustees, or representatives of those consumers. According to the plaintiffs, Section 1033 does not authorize the CFPB to determine the terms on which banks must furnish consumer data to these third parties.
• CFPB and the CFPA. In November 2024, Comerica Bank, a state member bank, sued the CFPB, asserting that it exceeded its statutory authority in its investigation of the bank's handling of the Direct Express prepaid card program. According to Comerica, the CFPB claimed that Comerica violated the Consumer Financial Protection Act (CFPA) due to alleged customer service deficiencies such as long call wait times and by failing to establish adequate security controls to prevent and detect fraud resulting from account takeovers. Comerica alleges that these claims are improper expansions of the scope of the CFPA. First, Comerica argues that Congress did not delegate to the CFPB unfettered discretion to declare any practice a UDAAP, and no federal court has endorsed the application of the CFPA's prohibition on UDAAPs to reach customer service call wait times that are allegedly too long. Second, Comerica argues that the Electronic Fund Transfer Act (EFTA), and not the CFPA, provides the regulatory framework for addressing fraudulent transactions resulting from account takeovers, and Comerica has complied with its obligations under the EFTA and Regulation E. By exceeding the scope of the CFPA and EFTA, Comerica alleges that the CFPB has denied it its fair notice rights that the Bank's alleged conduct fell under those respective statutes. Notably, Comerica also asserts that, as Financial Agent of the Direct Express program, it generally acted with the oversight and knowledge or approval of the federal government, which never raised significant concerns over the bank's handling of the program, and that the CFPB's funding structure violates the Appropriations Clause of the U.S. Constitution and the Dodd-Frank Act. Notwithstanding the Supreme Court's May 2024 decision upholding Congress' statutory authorization allowing the CFPB to draw its funding from the earnings of the Fed, this new challenge asserts there are no "earnings" of the Fed to draw from for funding, and funding the CFPB by "deficit" is unconstitutional.

1. APA Violations

When issuing new regulations, federal agencies must comply with the procedural and substantive requirements of the Administrative Procedure Act (APA). The APA requires agencies to provide notice of the rulemaking and give interested parties an opportunity to participate through the submission of written data, views, or arguments. A reviewing court may set aside agency action under the APA if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Financial institutions have previously relied on APA arguments in their challenges to federal rulemakings, and it is likely that future regulatory challenges will include APA arguments—especially after Chevron's demise in Loper Bright.

• For instance, in February 2024, the American Bankers Association, the U.S. Chamber of Commerce and five national and state associations sued the Federal Reserve, the FDIC, and the OCC, seeking to vacate recently revised final rules implementing the Community Reinvestment Act (CRA). The plaintiffs argue that the final rules violate the APA by exceeding the agencies' statutory authority under the CRA by assessing banks on their responsiveness to credit needs outside of their geographic deposit-taking footprint and on their digital delivery systems and deposit products. They also allege that the final rules are arbitrary and capricious because the federal banking agencies: (1) failed to give reasonable notice of the areas and products that will be assessed and the market benchmarks against which performance will be evaluated; (2) failed to conduct an adequate cost-benefit analysis; and (3) failed to consider the consequences of the final rules.

1. Agency Cannot Regulate Through Interpretive Rule

As compared to substantive rules, which effect a change in existing law or policy or affect individual rights and obligations, interpretive rules clarify or explain existing laws or regulations. While the APA exempts interpretive rules from its notice-and-comment requirements, as explained by the Supreme Court in Perez v. Mortgage Bankers Association, the APA contains other safeguards to prevent agencies from creating substantive changes to legislative rules under the guise of interpretations.

Federal agencies during the Biden-Harris Administration increasingly issued guidance labeled as interpretive rules. Challenges to these developments typically asserted that the guidance was in fact a new substantive rule, rather than a new interpretation of an old rule. Given the view of the first Trump Administration, as articulated by then-Principal Deputy Associate Attorney General Claire McCusker Murray, that "Subregulatory guidance isn't law—it's just paper," we expect the number of interpretive rules and the number of challenges to them to decrease during the second Trump Administration. Whether the next Administration will clean up what it perceives to be flawed guidance is an open question.

• NSF fees. In August 2023, the Minnesota Bankers Association and Lake Central Bank, a state nonmember bank, filed a lawsuit against the FDIC, alleging that its Financial Institutions Letter 40-2022, addressing banks' practice of charging multiple non-sufficient funds (NSF) fees for re-presented transactions, violates the APA. The plaintiffs argued that the supervisory guidance is a legislative rule because it imposes new legal obligations on banks and commits the FDIC to take enforcement actions under specific circumstances related to the new obligations. Since the FDIC did not issue the guidance through notice-and-comment, the plaintiffs alleged that the FDIC violated the APA. The plaintiffs also asserted that the supervisory guidance is an arbitrary and capricious agency action and exceeds the FDIC's statutory authority because, while the FDIC has enforcement authority, federal law does not give the FDIC rulemaking authority to identify specific acts or practices as unfair or deceptive. Although the district court dismissed the lawsuit for lack of standing, holding that the supervisory guidance was not final agency action, the case is currently on appeal in the 8th Circuit.
• Buy Now, Pay Later. In another example, in October 2024, the Financial Technology Association (FTA) sued the CFPB, challenging its interpretive rule on pay-in-four buy now, pay later (BNPL) products, claiming that the rule suffers from multiple defects under the APA and Truth-in-Lending Act (TILA). In relevant part, FTA argues that the BNPL rule sought to amend through an interpretive rule the Official Commentary to Regulation Z, which had been promulgated through notice-and-comment. Since agencies must "use the same procedures when they amend … a rule as they used to issue the rule in the first instance," FTA alleges that the CFPB violated the APA when it failed to issue the BNPL rule through notice-and-comment. FTA also asserts that the CFPB was required to go through notice-and-comment because TILA requires the CFPB to proceed "by regulation" when extending certain provisions to card issuers who do not impose a finance charge or require repayment in more than four installments. FTA further alleges that the BNPL rule is arbitrary and capricious and exceeds the CFPB's statutory authority under TILA.

1. Major Questions Doctrine

Under the major questions doctrine, courts have rejected agencies' assertion of regulatory authority when: (1) the underlying regulatory action concerns an issue of "vast 'economic and political significance,'" and (2) Congress has not clearly empowered the agency to act. In the U.S. Chamber of Commerce's suit against the CFPB, a court did just that. The Supreme Court's decision in Loper Bright, overturning Chevron deference, did not address the major questions doctrine, and it remains a candidate for further clarification.

The U.S. Chamber of Commerce and other industry plaintiffs filed a lawsuit against the CFPB in 2022, challenging an update to its Supervision and Examination Manual that expanded the CFPB's UDAAP authority to include discrimination. The district court ruled in favor of the plaintiffs and held that the CFPB's revised manual was unlawful because it violated the major questions doctrine. The court stated that "whether the CFPB has authority to police the financial-services industry for discrimination against any group that the agency deems protected, or for lack of introspection about statistical disparities concerning any such group, is a question of major economic and political significance" that would have a large economic impact. The court provided that the "broad authority staked out by the CFPB … would allow the agency to displace the balances struck by the States on those matters," and that "when the executive branch invokes authority that would 'significantly alter the balance between federal and state power,' Congress must grant that authority with 'exceedingly clear language.'" The court held that the invocation of such broad authority was not "exceedingly clear" given "the statutory text, structure, and history … [of] the Dodd-Frank Act's language authorizing the CFPB to regulate unfair acts or practices." The case is currently on appeal in the 5th Circuit.

Recent Supreme Court decisions in Loper Bright and Corner Post have undoubtedly shifted the legal backdrop favoring challenges to agency action. With the Supreme Court granting certiorari to hear several administrative law cases in its upcoming term, the landscape may be further unsettled. Notably, the Supreme Court's decision in Loper Bright did not address Auer deference—the deference an agency gives to its own guidance. Although the court's opinion in Kisor limited Auer deference a bit, Auer deference seems particularly ripe for reconsideration after Loper Bright.

And while the court's decision in Corner Post should bring more lawsuits against the agencies, it may also change the dynamic between industry players. Under Corner Post, settled rules can face new challenges, especially when new market entrants are affected by them. These challenges could lead to fractures within the financial services industry where, for instance, an established bank does not want a new fintech changing a favorable rule, guidance, or agency action that it has relied on.

The Impact of the Incoming Trump Administration

The second Trump Administration's deregulatory goals will likely have an impact on the subject and form of potential future challenges.

• States fill the void. As federal agencies either eliminate regulations or choose not to enforce certain ones, we expect the states to become more active to fill the perceived void—particularly in the consumer protection space. The Dodd-Frank Act provides states with the authority to enforce the CFPA, and during the last Trump Administration, certain state banking agencies and attorneys general increased their enforcement activities. New state laws and regulations and investigations by state banking agencies and attorneys general may shift the focus of the current litigation strategy to the states, which have their own administrative procedure acts. A shift in attention to the states would result in a new set of legal claims and arguments, including preemption.
• Sue-and-settle strategy. We would not be surprised to see some federal agencies in the second Trump Administration experiment with a "sue-and-settle" strategy to advance its policy agenda. Under this strategy, a special interest group sues a friendly administrative agency which agrees to a settlement, rather than seek dismissal of the claim, that creates duties and priorities outside of the normal rulemaking process. While this strategy has typically been used in the environmental arena in connection with advancing environmental protections, there is no reason to think that it could not be used in the financial services space. Until these new approaches have had an opportunity to crystallize, however, we expect that the ongoing challenges that we categorize above will proceed.
• More rigorous cost-benefit analysis. The Biden-Harris Administration substantially loosened the requirements for cost-benefit analyses. With the advent of a so-called "Department of Government Efficiency" (which may be a consultative body outside of the federal government) advising a newly empowered Office of Management and Budget, we expect there will be demands that federal agencies provide more thorough and data-driven cost-benefit analyses.
• Major questions doctrine. Vivek Ramaswamy, co-head of the proposed Department of Government Efficiency, earlier this year claimed that the major questions doctrine "renders quite literally most, as in a majority, of federal regulations unconstitutional." Consistent with his comments, we expect the major questions doctrine to have a larger role in setting regulatory boundaries.

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If you have questions about the potential impact of a second Trump Administration on your business activities, plans, or pending matters before a federal financial agency, please contact the authors or your DWT attorney contact.