The End of Chevron Deference – And Business Purpose Loans?

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In a landmark decision, (Loper v. Raimondo and Relentless v. DoC), the US Supreme Court restricted the power of federal agencies to interpret laws they oversee, emphasizing that courts should now rely on their own interpretations of ambiguous statutes. This ruling is expected to have broad implications nationwide, affecting everything from environmental regulations to healthcare costs.

The Decision Overturns 40 Years of Precedent

In a 6-3 vote, the justices overturned their pivotal 1984 Chevron v. NRDC decision, which had established the Chevron doctrine. This doctrine mandated courts defer to an agency’s interpretation of a statute if Congress had not clearly addressed the issue, so long as the agency’s interpretation was reasonable (“Chevron deference”). However, in a 35-page opinion written by Chief Justice John Roberts, the Court dismissed this doctrine as “fundamentally misguided.”

The Chevron decision has been cited over 18,000 times in federal court decisions since issuance. Though initially supported by conservatives for upholding the Reagan-era EPA’s interpretation of the Clean Air Act, it later became a target for those wishing to limit the administrative state. The justices had previously refused to reconsider Chevron but took up the issue last year in cases involving the National Marine Fisheries Service’s rule that required the herring industry to pay for on-board observers to monitor catches.  Essentially, a fishing boat was required to bring a government agent on its fishing expeditions and pay the agent to be there.  The agency required the fishing boat to pay (estimated at $710 per day) to carry observers on board their vessels to collect data about their catches and monitor for overfishing.  The owner of the boat sued the government for this policy.

Chief Justice Roberts found Chevron deference conflicts with the Administrative Procedure Act (APA), which directs courts to apply their own judgment to legal questions. He emphasized agency interpretations of statutes, like those of the Constitution, are not entitled to deference. Roberts asserted Congress expects courts to handle technical statutory questions and courts can consider agency interpretations under the doctrine known as ‘Skidmore deference.’  The APA, Roberts noted, directs courts to “decide legal questions by applying their own judgment” and therefore “makes clear that agency interpretations of statutes — like agency interpretations of the Constitution — are not entitled to deference.” Under the APA, Roberts concluded, “it thus remains the responsibility of the court to decide whether the law means what the agency says.”

Roberts dismissed the idea that agencies are better suited to interpret ambiguities in federal laws, even when those ambiguities involve technical or scientific issues. He also noted the Court’s decision would not require overturning earlier cases that relied on Chevron, as mere reliance on Chevron does not justify upholding agency actions if they were wrongly decided.

Justice Clarence Thomas, in a brief concurring opinion, stated the Chevron doctrine is inconsistent with both the APA and the Constitution’s separation of powers. Justice Neil Gorsuch, in a 33-page concurring opinion, declared the Court’s decision marks the end of Chevron, returning judges to interpretative practices which have guided federal courts since the Nation’s founding.

In her dissent, Justice Kagan criticized the decision to overrule Chevron, arguing that Congress often passes regulatory laws with ambiguities that agencies must interpret. For 40 years, agencies have been the ones to decide these interpretations, thanks to their expertise. She warned that overturning Chevron would disrupt the legal system and criticized the majority’s belief that the ruling would bring clarity, suggesting that judges would still argue over what “respect” for agency interpretations requires.

Roman Martinez, representing one of the fishing companies, praised the decision as a major step toward preserving the separation of powers and curtailing unlawful agency overreach. On the other hand, Kym Meyer of the Southern Environmental Law Center condemned the ruling, predicting it would lead to inconsistent results across hundreds of federal judges lacking agency expertise.

Why this Matters to Private Lenders

We know.  That sounds great, but why are we writing about fishing companies to a bunch of private lenders? When we say this is a landmark decision overturning 40 years of law, we’re not exaggerating.  This single decision will reverberate in every regulated business, including yours.  What’s changed? Let’s discuss below.

What You Thought You Know… is Gone: Business Purpose Loans on Shaky Ground Again

Last month, Partners Anthony Geraci and Melissa Martorella discussed the relative safety of business purpose loans. Through the Official Staff Commentary to Regulation Z (“OSC”), the CFPB tries to give lenders a sense of what will or will not qualify as a business purpose loan.  While still somewhat gray, those guideposts were well worn to guide you through stormy weather.  After Loper and Relentless, you can throw them out the window.  Without Chevron deference, the entire Official Staff Commentary to Regulation Z is rendered meaninglessAt best you can ensure the CFPB won’t come after you… maybe.

 Remember that 7 factor test to decide if the loan you are about to fund is a business purpose loan? Gone.  What about all the guidance about rental properties, whether partially owner occupied or non-owner occupied? The OSC provided guidance to determine whether those loans could be for a business purpose.  But after this decision, that guidance has no power and effect.  Even if the courts said otherwise, any litigator will now say that court relied on the OSC and Chevron, so now a new body of law challenging these as consumer laws will come into play. 

In short, Relentless and Lopez just reset the clock back to 1984, and we have no idea what business purpose loans are after this point in time.  Every guiding case we could give you is now suspect, and absent pure business purpose loans, you should be wary.

No Action Letters are Less Worthy

There are a myriad of agencies you as a private lender report to.  Every one of you is licensed by a state department entity.  For instance, in California, you’re regulated by either the Department of Real Estate or Department of Financial Protection and Innovation.  How these agencies regulate you is very similar to how federal agencies regulate you – through their regulations and then commentary, and then of course through no-action letters.  These no-action letters officially have been used to say that if you follow the course of action outlined in the letter, the agency wouldn’t take action against you. However, these have also been useful in court when sued, showing the court that since the agency has no issues with it, ipso facto through Chevron deference, they shouldn’t be sued either. Crazy, you say? It’s been very effective in Court. Until Now.

Crystal Ball: Less Helpful Agencies Lashing Out Against its Regulatees

Agencies will not be happy with this.  At all.  Imagine, you are an agency doing your best (whether we agree they are or not) to clarify this amalgamation of language and statutes and regulations through months (or years! Decades!) of sifting, publications, commentary, and finally, a polished rule.  And then all of a sudden, that clarity and guidance you created is all for naught – potentially. The door is open to litigation on both sides – in some cases, to argue for less regulation, and in others, to argue that exceptions to regulations provided in commentary should not have existed. In either case, Geraci’s attorneys are here to show you how best to proceed with your business and to make decisions moving forward.

Questions about this article? Reach out to our team below.

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