Supreme Court shuf­fle: 5 pos­si­ble re­ver­ber­a­tions for banks

A more con­ser­va­tive court will be like­lier to rule fa­vor­ably on is­sues rang­ing from the def­er­ence for reg­u­la­tory agen­cies to what con­sti­tutes a fair-lend­ing vi­o­la­tion.

National Mortgage News - - Contents - By Kate Berry & Hannah Lang


A Supreme Court that moves even fur­ther to the right with the ap­point­ment of Judge Brett Ka­vanaugh could make the pol­icy hori­zon even brighter for the fi­nan­cial ser­vices in­dus­try.

Pres­i­dent Trump an­nounced the nom­i­na­tion last month of Ka­vanaugh, who sits on the U.S. Court of Ap­peals for the D.C. Cir­cuit, to fill the seat va­cated by Jus­tice An­thony Kennedy. His con­fir­ma­tion would fur­ther bol­ster the con­ser­va­tive ma­jor­ity on the high court.

While much of the fo­cus on a Kennedy suc­ces­sor has cen­tered on how a more con­ser­va­tive jus­tice — and there­fore a more con­ser­va­tive ma­jor­ity on the court — will af­fect so­cial is­sues such as abor­tion, a more right­ward shift is seen as an­other pos­i­tive for a busi­ness com­mu­nity that has al­ready made gains

from con­gres­sional re­form of fi­nan­cial reg­u­la­tion and the tax code.

Here are five fi­nan­cial pol­icy ar­eas that could be im­pacted by a more con­ser­va­tive court: Chevron doc­trine

A ma­jor con­cern of banks and fi­nan­cial firms is the mea­sure of ju­di­cial def­er­ence given to ad­min­is­tra­tive agen­cies.

Given that Trump has been elim­i­nat­ing reg­u­la­tions put in place by for­mer Pres­i­dent Barack Obama, a Trump nom­i­nee would be ex­pected to side against ad­min­is­tra­tive over­reach, an is­sue Repub­li­cans have been chip­ping away at since the 1960s, lawyers said.

“What busi­nesses care about are le­gal cer­tainty, prin­ci­ples of dereg­u­la­tion and the abil­ity to con­duct their busi­ness with­out ad­min­is­tra­tive over­reach,” said Don Lampe, a part­ner at Mor­ri­son & Fo­er­ster.

Much of the fi­nan­cial lit­i­ga­tion wind­ing its way to the Supreme Court has at its core what def­er­ence is due to an agency in in­ter­pret­ing ex­ist­ing bank reg­u­la­tory pol­icy.

Un­der the so-called Chevron doc­trine, named after a Supreme Court case, courts will gen­er­ally de­fer to the statu­tory in­ter­pre­ta­tion by a govern­ment agency charged with im­ple­ment­ing the statute, as long as the agency’s in­ter­pre­ta­tion is sound.

Mem­bers of the court’s cur­rent con­ser­va­tive wing have been crit­i­cal of the doc­trine. Be­fore he be­came a Supreme Court jus­tice, Neil Gor­such, in an ap­peals court de­ci­sion, notably re­ferred to the def­er­ence granted reg­u­la­tors as an “ele­phant in the room” that “per­mit[s] ex­ec­u­tive bu­reau­cra­cies to swal­low huge amounts of core ju­di­cial and leg­isla­tive power.”

If the high court at­tempted to roll back the Chevron doc­trine, it could sig­nif­i­cantly im­pact poli­cies by the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau and other agen­cies.

CFPB lead­er­ship struc­ture

Ka­vanaugh wrote a 110-page opin­ion in a case, PHH vs. CFPB, in which he found the agency’s sin­gle-direc­tor struc­ture was un­con­sti­tu­tional but stopped short of elim­i­nat­ing the bu­reau out­right.

Ka­vanaugh’s de­ci­sion on a three-judge panel was over­ruled in Jan­uary by the full U.S. Court of Ap­peals for the D.C. Cir­cuit, which af­firmed the con­sti­tu­tion­al­ity of the agency.

One over­looked as­pect of the PHH rul­ing dealt with up­hold­ing the due process rights of com­pa­nies to sue their reg­u­la­tor.

“Ka­vanaugh set forth a strong view on com­pa­nies be­ing en­ti­tled to due process in ad­min­is­tra­tive pro­ceed­ings,” Lampe said.

Other ob­servers said a right­ward shift on the court could lead to the jus­tices to fur­ther re­con­sider the bu­reau’s struc­ture.

“A more con­ser­va­tive Supreme Court will be more in­clined to find the CFPB struc­ture un­con­sti­tu­tional,” said Dan Crow­ley, a part­ner at K&L Gates. “The whole con­ser­va­tive mantra of strict con­struc­tion­ism means read­ing the con­sti­tu­tion as it is writ­ten, as op­posed to try­ing to rein­vent the con­sti­tu­tion or ju­di­cial ac­tivism. I think the sep­a­ra­tion of pow­ers doc­trine is pretty clearly vi­o­lated by the struc­ture of the CFPB.”

In­ter­est rate lim­its for debt buy­ers

The Supreme Court in 2016 had de­clined to hear the case known as Madden v. Mid­land, but le­gal ex­perts say the is­sue of which ju­ris­dic­tion’s in­ter­est rate rules ap­ply in an in­ter­state loan sale could come back be­fore the high court.

The 2015 rul­ing in the Madden case by the U. S. Court of Ap­peals for the Se­cond Cir­cuit knocked down the the­ory that a loan was “valid when made,” which sud­denly cast doubt on mar­ket­place loans sold in states with usury caps.

The rul­ing tech­ni­cally ap­plied only in states gov­erned by the Se­cond Cir­cuit: Con­necti­cut, New York and Ver­mont.

“I think a new court could re­verse Madden,” said Lawrence Kaplan, chair of the bank reg­u­la­tory group in the bank­ing and pay­ments sys­tems prac­tice of Paul Hast­ings.

“The Se­cond Cir­cuit over­turned a hun­dred years of prece­dent. If you have a more con­ser­va­tive court, they are more likely to look at Madden when the loan was made ver­sus when the loan was sold,” Kaplan said.

While the high court pre­vi­ously had balked at hear­ing the case, Kaplan said that was most likely be­cause the de­ci­sion of the Se­cond Cir­cuit had not been in con­flict with a rul­ing by a dif­fer­ent ap­peals court.

“The Supreme Court could take Madden up again if there is a cir­cuit split,” he said.

Fair lend­ing

A more con­ser­va­tive Supreme Court could re­ex­am­ine the use of the dis­parate im­pact rule in fair lend­ing. Kennedy was a swing vote and sided with the lib­eral judges in the 2015 Supreme Court case Texas De­part­ment of Hous­ing and Com­mu­nity Af­fairs v. The In­clu­sive Com­mu­ni­ties Project, which ruled that the Fair Hous­ing Act of 1968 bans both ex­plicit dis­crim­i­na­tion and im­plicit dis­crim­i­na­tion. Dis­parate im­pact states that lenders and other de­fen­dants can be found ac­count­able for racial dis­crim­i­na­tion even if it was un­in­ten­tional.

“Jus­tice Kennedy, a con­ser­va­tive, wrote in 2015 that ’re­stric­tions that un­fairly ex­clude mi­nori­ties’ are un­law­ful,” said Jesse Van Tol, the CEO of the Na­tional Com­mu­nity Rein­vest­ment Coali­tion. “This is a sim­ple stan­dard of fair­ness.”

The De­part­ment of Hous­ing and Ur­ban De­vel­op­ment has sig­naled it will soften dis­parate im­pact rules, which could spark le­gal bat­tles and force the is­sue to come back be­fore the court.

“We’ve al­ready seen the ad­min­is­tra­tive shift on dis­parate im­pact,” said Isaac Boltan­sky, the direc­tor of pol­icy re­search at Com­pass Point. “We could see even more un­der a con­ser­va­tive court.”

The Equal Credit Op­por­tu­nity Act of 1974, which made it un­law­ful for cred­i­tors to dis­crim­i­nate against ap­pli­cants, could also be open to rein­ter­pre­ta­tion un­der a more con­ser­va­tive court.

“Where some ob­servers might have seen a stretch in terms of in­ter­pret­ing some­thing as a fair-lend­ing vi­o­la­tion un­der ECOA, a more con­ser­va­tive court may not see that ac­tiv­ity as a vi­o­la­tion,” Kaplan said.

GSE div­i­dend agree­ment

Fan­nie Mae and Fred­die Mac share­hold­ers could also ben­e­fit from a more con­ser­va­tive court as they con­tinue to chal­lenge the third amended div­i­dend agree­ment, which di­rected the gov­ern­mentspon­sored en­ter­prises to pay the Trea­sury De­part­ment a quar­terly net worth sweep of prof­its be­gin­ning in 2012.

“The the­ory would be that a con­ser­va­tive is more likely to value pri­vate prop­erty and see this as an il­le­gal tak­ing,” Jaret Seiberg, an an­a­lyst for Cowen Re­search Group, wrote in a re­search note.

How­ever, Seiberg cau­tioned that conservatives tra­di­tion­ally want judges to is­sue rul­ings based on con­gres­sional leg­is­la­tion, and in the Hous­ing and Eco­nomic Re­cov­ery Act of 2008, Congress re­stricted the abil­ity of in­vestors to sue.

In Fe­bru­ary, the Supreme Court de­clined to hear an ap­peals case chal­leng­ing the net worth sweep, leav­ing in­tact a lower court’s rul­ing that reaf­firmed in­vestors can­not sue the govern­ment over the div­i­dend change.

“I think there’s some who are mak­ing it out that it will im­pact Fan­nie and Fred­die, but I’m not as sold there,” said Boltan­sky. “We need a case that gets there first.”

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