The Supreme Court Revisits Chevron: What Does It Mean for Banking Regulation?

UPDATE: As widely expected, the Supreme Court on Friday, June 28, overturned the 1984 Chevron precedent, significantly curbing the regulatory power of federal agencies. Chief Justice John Roberts stated, “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority.” This decision will impact how banking regulations are interpreted and enforced, creating new legal and compliance challenges for the industry. Read more insights below.

SEE ALSO: In October, we published a follow-up article entitled, “The State of Banking Regulation as the Next Supreme Court Term Begins.”

For 40 years, federal courts have reviewed statutory interpretation by federal agencies using the analysis prescribed by the U.S. Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. Any day now, the court is expected to decide two cases—Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. U.S. Department of Commerce—that will provide it the opportunity to modify or overturn the so-called “Chevron doctrine.” The court’s decision could affect all corners of the federal government, touching cabinet-level departments from Agriculture to Veterans Affairs. It also will affect the rulemaking and other decisions of independent federal agencies, including the federal prudential banking regulators: the Fed, the FDIC, and the OCC. The court’s decision is expected by the end of term, which usually occurs at the end of June or in early July.

The two-step analysis established in Chevron requires a federal court reviewing an agency interpretation to first ask whether Congress has spoken directly to the question at issue. If so, the text states, “that is the end of the matter; for the court as well as the agency, must give effect to the unambiguously expressed intent of Congress.” If the statutory provision under review is ambiguous, Chevron requires the court to defer to the agency’s interpretation, so long as it is reasonable, even if the court itself would have reached a different or contrary conclusion.   

Some have criticized the Chevron approach because it encourages agencies to push the envelope to arrive at novel statutory interpretations to achieve outcomes that Congress did not necessarily foresee or intend. Recently, for example, a group of banking trade associations brought suit seeking to overturn the banking agencies’ new Community Reinvestment Act rule on the grounds, in part, that portions of the rule went beyond what the language of the statute authorized the agencies to do. Applying Chevron deference could make it more likely that those portions of the rule would survive the challenge. The absence of Chevron deference could tilt the outcome in the other direction.

Here is a preview of questions that we expect will be answered over time once the court issues its decisions in Loper Bright and Relentless. 

• Will the court abandon Chevron? Probably. Many of those who heard or read the oral arguments in the Loper Bright and Relentless cases believe that the court is poised to overturn Chevron. Observers thought that the three Democrat appointees—Kagan, Sotomayor, and Jackson—were leaning against abandoning Chevron, while the remaining members of the court were ready to overturn it. The key question is whether, if Chevron is overturned, the court would articulate a substitute standard or would simply leave it to the lower courts to apply traditional tools of statutory construction on a case-by-case basis. If the court articulates a substitute, it could announce a wholly new approach or, perhaps more likely given the tenor of the oral arguments, it could rely on other existing standards of review. One such standard is so-called Skidmore deference, which calls for a reviewing court to give an agency’s interpretation the weight it is entitled to based on its power to persuade (that is, the strength of the agency’s reasoning and support for its conclusion). Another is Auer deference, under which a reviewing court defers to an agency’s interpretation of its own rules unless the interpretation is plainly erroneous.
  
  In the absence of a new replacement standard for Chevron, the agencies in their role as litigants would be compelled to produce the most persuasive reasoning and, as appropriate, factual support they can. The outcome could be that, as a practical matter, a Skidmore type of deference will prevail.
  
  
• What will the immediate effect of that outcome be on banks? The effect is likely to be limited, at least at first. The Supreme Court’s decisions ordinarily are prospective only, which means that even if the court overturns Chevron, previously decided cases relying on Chevron will continue to stand. If the court announces a new standard, or reverts to an older one, it likely will take time for the lower federal courts to come to a consistent application of the standard. 
  
  
• What longer term consequences could occur? The answer depends on the court’s precise holding of course, but potential consequences could include the following:
  
  • Banks may be more inclined to challenge agency interpretations. Depending on the standard the court prescribes, if any, agency interpretations may no longer be considered dispositive, and banks, accordingly, will see more reason to turn to the courts for affirmation of what they view as the best interpretation of an ambiguous provision.
  • There will be greater uncertainty in banking law. Litigation often takes years to progress through the court system. Different federal circuit courts of appeals may reach different conclusions on the same issue, creating circuit splits. Some issues, at least, could be taken up by the Supreme Court. In the meantime, banks will have to fashion compliance strategies in the absence of certainty about the rules.
  • Agency decisions, especially rules issued jointly by the three agencies, will take longer to complete. The agencies’ appetites for the post-Chevron risk of reversal in court will vary. In those situations, it is often the most conservative agency view that prevails. But interagency negotiations could be even more protracted than they are now, and individual agencies may add layers of internal review to their decision-making in an effort to protect against reversal of their decisions in court.
  • Agencies may try to position themselves for favorable court review of their interpretations by developing more detailed, carefully reasoned records of their decision-making so that their conclusions will be persuasive even in the absence of Chevron deference.   
• What can Congress do if Chevron is overturned? Congress could legislate a standard for courts to use when reviewing agencies’ statutory interpretation. In fact, Congress did just that in the Dodd-Frank provisions prescribing Skidmore deference as the standard of review for OCC preemption determinations. The likelihood that Congress would act on this issue is, at least at present, highly uncertain given the sharp partisan divide in both chambers. 

While we await the Supreme Court’s decision on Chevron, the banking industry should prepare for a potential paradigm shift in regulatory interpretation. While immediate effects may be limited, the long-term implications could usher in a new era of legal challenges and uncertainties. Banks, regulators, and lawmakers will need to navigate this evolving landscape with heightened vigilance and adaptability. The court’s ruling may ultimately redefine the balance of power between federal agencies and the judiciary, emphasizing the importance of clear, well-reasoned regulatory frameworks. As the industry braces for these changes, proactive engagement and strategic foresight will be essential to maintaining stability and compliance amid the shifting tides of legal precedent. 

This article was prepared by RMA corporate member Covington & Burling LLP at RMA’s request.

Karen Solomon is senior of counsel for Covington & Burling LLP. She advises clients on a broad range of financial services regulatory matters. Karen’s extensive experience working in agencies that supervise national banks and Federal savings associations enables her to offer an informed, practical approach to addressing regulatory issues.

Michael Nonaka, partner, is co-chair of Covington’s Financial Services Group and advises banks, financial services providers, fintech companies, and commercial companies on a broad range of compliance, enforcement, transactional, and legislative matters. He specializes in providing advice relating to federal and state licensing and applications matters for banks and other financial institutions.

Michael Reed, partner, advises Covington clients on public and private transactional, strategic, regulatory, compliance, corporate finance, and disclosure matters. He represents publicly and privately held companies and private equity firms, with an emphasis on financial institutions, fintech companies, and diversified companies.

Brandon Howell is an associate in Covington’s financial institutions group. Brandon uses his prior experience working at the Federal Reserve Board and Office of the Comptroller of the Currency to assist banks, bank holding companies, and other financial service-related companies in connection with regulatory, compliance, and enforcement matters.