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.
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.
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.”