Why the ‘Chevron Two-Step’ Matters So Much to Banks and Credit Unions

Viewpoint: How does a lawsuit involving commercial fisheries entangle banking in its net? The decades-old 'Chevron standard' dictated how congressional, judicial and regulatory agency actions interplayed. But now the U.S. Supreme Court appears poised to abandon that longtime standard after federal courts have applied it thousands of times.

The most significant banking case of my legal career involves . . . fishery management. Allow me to explain.

The Loper and aptly-named Relentless cases argued at the Supreme Court on Jan. 17 concern a federal law that authorizes the National Marine Fisheries Service to “implement a comprehensive fishery management program.” The implementing NMFS regulation requires fishermen to pay approximately $710 daily to carry onboard observers to collect conservation and management data. The U.S. Court of Appeals for the D.C. Circuit upheld the regulation by applying the “Chevron Two-Step.”

Understanding How the ‘Chevron Two-Step’ Goes

The Chevron Two-Step has been a judicial dance craze since 1984. That year, in Chevron v. Natural Resources Defense Council, the Supreme Court announced a new standard of deference to an administrative agency’s interpretation of a statute it is charged with administering.

• Under Step One, a court decides whether Congress has directly addressed the question in the law at issue.

• If it has not, under Step Two, the court will uphold the agency’s reasonable interpretation of that law. Cha-cha-cha.

Over the last 40 years, Chevron has become one of the most-cited Supreme Court cases.

Potentially the End of an Era:

The federal courts have relied on Chevron in more than 18,000 cases, the majority of which upheld agency interpretations. Although in recent years the Supreme Court has not cited Chevron, the lower courts have continued to do so.

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Pro and Con Points on the Chevron Debate

Experts make strong cases on both sides of this longstanding legal standard.

Critics argue that the agencies’ judicial success record has created an emboldened and unchecked “Administrative State.”

These critics claim Chevron deference violates the separation of powers framework under the U.S. Constitution. In this view, Chevron deference allows executive branch agencies to exercise the powers of the judiciary (by saying what the law is) and of Congress (by substituting their judgment about what the law should be).

Supporters, including the Biden Administration, counter that Chevron deference is appropriate and necessary to a functioning government.

Appropriate because, unlike judges and legislators, federal agencies have specialized expertise in the statutes they administer. Necessary because federal agency regulations apply nationwide, avoiding the inconsistencies that would result from piecemeal litigation of the myriad issues handled by the agencies.

The Supreme Court is unlikely to issue its decision in the Loper/Relentless cases before spring 2024. The questioning of the justices during arguments, however, suggests that the Court will side with the critics and bring the dancing to an end. Whether it will do so by overturning Chevron or modifying it remains to be seen.

Read more: Five Takeaways from the Senate Banking Hearing That Got Lost in the Drama

How a Fishing Controversy Washed Up on Banking Shores

But what does invalidating a $710 fishing rule have to do with banking? Everything.

Like fisheries, banks are subject to old and broadly worded statutes, the interpretation of which is handled by administrative agencies. Like the NMFS, the banking agencies sometimes interpret these statutes to impose substantial costs on their regulated entities. Like the NMFS, the banking agencies have previously been given judicial deference on many of these interpretations.

Like the fishing industry, the banking sector may soon be left wondering what law applies to them.

The demise of Chevron will not immediately invalidate the rulemakings on which the banking agencies have received deference. But it will unleash a storm of challenges to perceived agency overreach. Some bankers and credit union executives, tiring of regulatory overload, will cheer these challenges. However, they should be careful what they wish for.

Eliminating Chevron deference is a double-edged sword. Industry watchers would undoubtedly celebrate the invalidation of the Basel III Endgame or the climate-related financial risk management guidance.

But the industry would be less enthusiastic about challenges to permissive agency interpretations, such as the “valid when made” rules of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

And although some cynics think that cowed regulators reluctant to adopt new rules would be a good thing, no one looking for regulatory clarity should hope for regulatory paralysis.

Michele Alt is a partner at Klaros Group. She served for more than two decades in the law department of the Office of the Comptroller of the Currency.

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