Last Week, This Morning

July 1, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)1" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or

Please note that we will not deliver "Last Week, This Morning" next week due to the Fourth of July holiday. The next email will be delivered to your inbox on Monday, July 15. We wish you a very safe and happy Fourth of July!

U.S. Supreme Court Overrules Chevron Doctrine

On June 28, in a 6-3 ruling, the U.S. Supreme Court overruled the 1984 case of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., which required courts to use a two-step process to interpret statutes administered by federal agencies and to give deference to federal agencies' interpretation of ambiguous federal law. The first step was to determine "whether Congress has directly spoken to the precise question at issue." According to the Chevron court, "[i]f the intent of Congress is clear, that is the end of the matter," and courts are therefore to "reject administrative constructions which are contrary to clear congressional intent." However, if "a statute was silent or ambiguous with respect to the specific issue" at hand, a reviewing court could not "simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation." Instead, the Chevron court required a second step where the reviewing court had to defer to the federal agency if it had offered "a permissible construction of the statute," even when the reviewing court reads the statute differently. Based on this test, the Chevron court concluded that the Environmental Protection Agency's interpretation of the Clean Air Act was a permissible construction and entitled to deference.

In the current Supreme Court case - Loper Bright Enterprises v. Raimondo - the reviewing courts applied Chevron's two-step process to resolve challenges by petitioners to a rule promulgated by the National Marine Fisheries Service ("NMFS") (a subsidiary of the U.S. Department of Commerce) pursuant to the Magnuson-Stevens Act, which incorporates the Administrative Procedure Act. Those challenges were resolved in favor of the federal agency. The Magnuson-Stevens Act permits the NMFS to require fisheries to "carry" federal observers on board their fishing vessels to enforce the NMFS's regulations, particularly to prevent overfishing. The Magnuson-Stevens Act does not explicitly require fisheries to pay the costs of federal observers. However, the NMFS issued a rule in February 2020 that required the fisheries to pay the costs of these federal observers who board their vessels. The underlying two lawsuits were filed by owners of fishing vessels that argued that the Magnuson-Stevens Act did not authorize the NMFS to mandate industry-funded monitoring of fisheries.

The U.S. Supreme Court granted certiorari in the two cases, limited to the question of whether Chevron should be overruled or clarified. The Court held that "[t]he Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous." According to the Court, Section 706 of the APA "specifies that courts, not agencies, will decide 'all relevant questions of law' arising on review of agency action - even those involving ambiguous laws - and set aside any such action inconsistent with the law as they interpret it. And [Section 706] prescribes no deferential standard for courts to employ in answering those legal questions. That omission is telling, because Section 706 does mandate that judicial review of agency policymaking and factfinding be deferential."

The Court clarifies that its holding overruling Chevron "does not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful - including the Clean Air Act holding of Chevron itself - are still subject to statutory stare decisis despite the Court's change in interpretive methodology."

Amicus brief(ly): This is a very consequential decision (that feels like an understatement). Agencies charged with interpreting federal laws should expect industry challenges to rulemakings brought by plaintiffs who will have a new sense of confidence, now that the courts do not have to defer to the agencies' judgment on those new rules. This case is likely to slow down the implementation of new rulemakings considerably, especially rulemakings where agencies are imposing burdensome requirements that do not flow clearly from a statutory mandate. But expect consumer advocates to challenge rulemakings that industry favors with a vigor equal to industry challengers of rulemakings burdensome to industry - this will not be a one-way street.

FHFA Conditionally Approves Limited Pilot Allowing Freddie Mac to Purchase Certain Second Mortgage Loans

On June 21, the Federal Housing Finance Agency announced its conditional approval for the Federal Home Loan Mortgage Corporation to engage in a pilot to purchase single family closed-end second mortgages. The pilot, developed in response to the FHFA's proposal of the new product in April and comments received during the 30-day comment period, includes several limitations, including:

  • a maximum volume of $2.5 billion in purchases;
  • a maximum duration of 18 months;
  • a maximum loan amount of $78,277, adjusted annually in accordance with Regulation Z;
  • a minimum seasoning period of 24 months for the first mortgage; and
  • eligibility only for principal/primary residences.

According to the FHFA, at the end of the pilot, it will analyze the data to determine whether the objectives of the pilot were met, including providing lower-cost alternatives to existing cash-out refinance products, benefitting underserved borrowers, and broadening participation in the home equity market to smaller financial institutions that can effectively serve their local communities, while also avoiding crowding out private capital or producing unintended macroeconomic or mortgage market effects.

The FHFA noted that the product incorporates safety and soundness guidelines, as it expects that the pricing of eligible second mortgages, as well as the capital requirements associated with them, will appropriately reflect the risks that they pose, and it limits the maximum combined loan-to-value ratio of the first and second mortgages to 80 percent to protect against a decline in home prices.

The FHFA also noted that any increase in the volume or extension of the duration of the pilot, or a conversion of the pilot to a programmatic activity, would be treated as a new product subject to public notice and comment and FHFA approval.

The Mortgage Bankers Association, which submitted a comment letter in response to the proposal, issued a statement in response to announcement of the pilot: "MBA and its members will remain engaged with FHFA and Freddie Mac to monitor the results of the pilot and ensure that it remains available to lenders of all sizes and business models and avoids disrupting the developing private-label securitization market for second liens."

Amicus brief(ly): The interest of the MBA and its members in the outcome of this development is material because of the impact on this deep-pocketed player in the market. The pilot includes some limitations on the extent of Freddie Mac's participation in the market, but at $2.5 billion in purchases over the year-and-a-half pilot program, this will likely be disruptive to the secondary market whether or not the Federal Reserve Board starts to decrease interest rates. We will continue to monitor the pilot program to see how it goes both for Freddie Mac and for the secondary market for junior-lien home equity loans.

Federal Agencies Finalize Rule Implementing Quality Control Standards for Automated Valuation Models

On June 24, the Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Federal Housing Finance Agency issued a final rule that implements quality control standards for automated valuation models ("AVMs") used in valuing real estate collateral securing residential mortgage loans. According to the final rule, the term "automated valuation model" is "commonly used to describe computer programs that estimate a property's value and are used for a variety of purposes, including loan underwriting and portfolio monitoring." In June 2023, the agencies invited comment on a notice of proposed rulemaking to implement these quality control standards and received approximately 50 comments. The agencies finalized the rule largely as proposed.

The final rule requires that mortgage originators and secondary market issuers adopt policies, practices, procedures, and control systems to ensure that AVMs used in certain credit decisions or covered securitization determinations adhere to quality control standards designed to: (1) ensure a high level of confidence in the estimates produced; (2) protect against the manipulation of data; (3) avoid conflicts of interest; (4) require random sample testing and reviews; and (5) comply with applicable nondiscrimination laws.

The final rule is effective the first day of the calendar quarter following 12 months after the date the final rule is published in the Federal Register.

Amicus brief(ly): AVMs have gained traction over the past decade or so as less-expensive and increasingly reliable proxies for a full appraisal, and it appears from the low volume of comments that the industry is not resisting this rule. That stands to reason, as industry has as much riding on the effectiveness of AVMs in estimating property values as anyone else. This rule is an important step in solidifying the role of AVMs in mortgage loan underwriting and portfolio management. Lenders and secondary market participants will spend the next year developing and testing the required policies, procedures, and controls to prepare for the effective date of the rule.

Federal District Court Issues Preliminary Injunction Enjoining Colorado from Enforcing DIDMCA Opt-Out

On June 18, a Colorado federal district court granted the plaintiffs' motion for a preliminary injunction in Colorado's Depository Institutions Deregulation and Monetary Control Act ("DIDMCA") opt-out lawsuit. The lawsuit was filed in March by three consumer financial services industry trade groups, alleging that the DIDMCA opt-out bill Colorado enacted in 2023 is invalid. The preliminary injunction enjoins Colorado from "enforcing the interest rates in the Colorado [Uniform Consumer Credit Code] with respect to any loan made by the plaintiffs' members, to the extent that the loan is not 'made in' Colorado and the applicable interest rate in Section 1831d(a) exceeds the rate that would otherwise be permitted."

In 2023, Colorado became the second state to opt out of Section 521 of the DIDMCA. Congress passed the DIDMCA to allow state-chartered banks to lend nationwide at rates up to the higher of their home state's interest-rate cap or a federal interest-rate cap. By opting out, a state could impose its own interest-rate cap, although it could only impose such a rate cap on loans "made in" the opting-out state. The trade group plaintiffs argued that Colorado's interpretation of "made in" was too broad. The plaintiffs contended that the determination of where a loan is "made" should be based on where the bank is located and performs its non-ministerial functions. Conversely, the state of Colorado argued that a loan is "made in" both the state where the bank enters into the transaction and the state where the borrower enters into the transaction.

The court agreed with the plaintiffs that the determination of where a loan is made under Section 1831d depends on where the lender performs its loan-making functions, not the borrower's location. The court reviewed the statutory text of the opt-out provision and found that the plaintiffs' view is more consistent with the ordinary colloquial understanding of who "makes" a loan. (The bank "makes" a loan while the borrowers "obtain" or "receive" a loan.) The court also found that the plaintiffs' view is more consistent with how the words "make" and "made" are used in the Federal Deposit Insurance Act and the sections of the U.S. Code that govern "Banks and Banking."

The court then addressed the various policy arguments and persuasive authorities the parties cited in their pleadings. The court found that only one interpretive letter issued by the FDIC addresses the question, although it did not resolve it. The court noted that the remaining FDIC interpretation letters fail to address the issue, but those letters acknowledge that the FDIC uses "made" colloquially. The court found that such acknowledgement reinforces the ordinary colloquial understanding that where the bank makes the loan and where a loan is made is where the bank performs its loan-making functions.

Finally, the court determined that the plaintiffs made a strong showing that they are substantially likely to succeed on the merits of their preemption claim and that they have shown a threat of irreparable harm. Additionally, the court found that the balance of harms weighs in the plaintiffs' favor, and the public interest favors enjoining enforcement of likely invalid provisions of state law.

The preliminary injunction issued by the court is limited in its application. It only prohibits Colorado from enforcing the preempted interest rates against the plaintiffs' members, as they are the parties to the lawsuit.

Amicus brief(ly): State legislation opting out of Section 521 as a reaction to bank partnership lending has picked up steam in the last year or so, and the outcome of this case may dictate the pace at which it continues. The elusive FDIC interpretive letter is important (though, as referenced above in the discussion of the SCOTUS decision abandoning Chevron deference to the agency, the impact of the letter's reasoning is uncertain at this point) because of its focus on where a loan is "made" and how that affects the determination of which state's interest rates apply. State-chartered banks with multistate lending programs have to watch this case, and while it plays out they should review loan agreements' governing law provisions to evaluate the strength of a potential argument that the law of a state other than Colorado controls when the consumer lives in Colorado. The preliminary injunction imposed last week is not as consequential as the final disposition of this case will be.

Louisiana Enacts Bill Regulating Data Collection of Minors by Social Media Platforms

On June 18, Louisiana enacted House Bill 577, which adds a chapter to Title 51 of the Louisiana Revised Statutes relating to the protection of children's internet data. The new law prohibits a social media platform with more than one million account holders globally that is operating in the state from displaying "targeted advertising," as defined, at a minor account holder and/or selling sensitive personal data, as defined, of a minor account holder. "Minor account holder" is defined as an individual account holder who is a Louisiana resident where the social media platform has actual knowledge that the individual is under age 18 and is not emancipated or married. A social media platform is not prohibited from: (1) allowing user-generated content to appear in a chronological manner for a minor account holder; (2) displaying user-generated content that has been selected or followed by a minor account holder; or (3) providing search results in response to a specific and immediately preceding query by the minor account holder. The law provides certain exceptions from liability for a social media platform in connection with efforts to determine if an individual is a Louisiana resident or is under 18 and for erroneous determinations of residency or age.

The new law provides for enforcement by the attorney general, who is required to give a 45-day notice of right to cure before filing an enforcement action. Any social media platform that violates the provisions of the new chapter is subject to a civil fine of up to $10,000 per violation, and a person who violates an administrative or court order issued for a violation of the chapter is subject to a civil penalty of not more than $5,000 for each violation.

The new law is effective on July 1, 2025.

Amicus brief(ly): Data use and sharing remains an area of legislative focus, as does the protection of minors from the potential harms of social media use, and Louisiana combines those concerns in an effort to limit the way social media companies target minors with advertising. The federal government is focused on the protection of minors as well, looking to build on the Children's Online Privacy Protection Act that dates back to 2000 with potential legislation to try and support parents' efforts to limit kids' access to at least some social media platforms. The new law tries to balance that protection with allowing minors to use age-appropriate social media as intended, but it imposes limitations on social media companies to make sure they are doing their part to restrict content and data sharing for social media account holders who are minors.

CFPB Sets New Compliance Dates for Small Business Lending Rule

On June 25, the Consumer Financial Protection Bureau extended compliance dates for its Small Business Lending Rule promulgated pursuant to Section 1071 of the Dodd-Frank Act. The rule requires covered financial institutions to collect data on certain credit applications from small businesses and report that data to the CFPB. The extension follows the U.S. Supreme Court's decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd. (the "CFSA case"), holding that the CFPB's funding structure is constitutional. After the CFPB issued the rule in March 2023, a Texas court (in Texas Bankers Association v. Consumer Financial Protection Bureau) stayed the rule pending the outcome of the CFSA case. In Texas Bankers, the court ruled that if the Supreme Court overturned the Fifth Circuit's CFSA case (which it did), then the CFPB must extend the compliance deadlines by the same number of days as the duration of the stay, which began on July 31, 2023. Because the stay lasted for 290 days, the CFPB has extended the compliance deadlines by 290 days.

Compliance deadlines are tiered, based on volume of loan origination. Lenders with the highest volume of small business loans will now be required to begin collecting data by July 18, 2025, moderate volume lenders by January 16, 2026, and smallest volume lenders by October 18, 2026. The deadline for reporting small business lending data to the CFPB is June 1 following the calendar year for which data are collected.

Amicus brief(ly): The effective date of this small business data rule has been a long time coming, given that the CFPB adopted the rule in March of last year. Now small business lenders know they have a year to develop systems for collecting the required transaction data to report. As a reminder for those small business lenders that may not have been monitoring this rule closely, it applies broadly to providers of loans, lines of credit, credit sales, or revenue-based financing to small businesses. The CFPB has a webpage designed to provide compliance resources to such providers.

1 For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.