Consumer Protection & Privacy

Challenge to CFPB’s Constitutionality Reemerges

 by Barbara S. Mishkin

The issue of the CFPB’s constitutionality reemerged last week in court and Congress.

On the judicial front, the U.S. Court of Appeals for the D.C. Circuit, in State National Bank of Big Spring, Texas, et al. v. Lew, et al., reversed the district court and ruled that the bank had standing to challenge the  constitutionality of the CFPB and Director Cordray’s recess appointment. The D.C. Circuit did not, however, rule on the merits of the bank’s constitutionality claims. (In January 2014, in the CFPB’s enforcement action against Morgan Drexen, a California federal court rejected on the merits a challenge to the CFPB’s constitutionality.)

The case before the D.C. Circuit was originally filed in June 2012 by State National Bank of Big Spring (SNB) and two D.C. area non-profit organizations that joined SNB as plaintiffs. Eleven Republican state Attorneys General subsequently joined as plaintiffs on the amended complaint filed in September 2012. The original complaint challenged the constitutionality of Director Cordray’s recess appointment. It also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers and that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank was unconstitutional. The AGs did not join those portions of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank. In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.

The D.C. Circuit’s decision [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance] consisted of the following four rulings:

  • • SNB has standing to challenge the CFPB’s constitutionality and the challenge is ripe because SNB is regulated by the CFPB. The court used the CFPB’s Remittance Rule as an example of the CFPB’s exercise of its regulatory authority to impose new obligations on SNB. SNB had alleged that the increased compliance costs resulting from the Remittance Rule, coupled with an alleged loss of business, provided sufficient injury to establish standing. According to the court, SNB was not required to violate the Remittance Rule and trigger an enforcement action to challenge the legality of the CFPB itself. The D.C. Circuit remanded to the district court for it to consider the merits of SNB’s constitutionality claim.
  • • SNB has standing to challenge the constitutionality of Director Cordray’s recess appointment and such challenge is ripe for the same reasons. While it reversed and remanded to the district court to consider the merits of the issue in light of the U.S. Supreme Court’s decision in Noel Canning, the D.C. Circuit also noted that it “leave[s] it to the District Court to consider the significance of Director Cordray’s later Senate confirmation and his subsequent ratification of the actions he had taken while serving under a recess appointment [lexis.com | Lexis Advance].”
  • • SNB does not have standing to challenge the FSOC because SNB could not rely on the doctrine of “competitor standing” to argue that the designation of another entity as “too big to fail” indirectly harmed SNB by creating a “reputational benefit” for the competitor.
  • • The State AGs do not have standing to challenge Dodd-Frank’s order liquidation authority and the claim is not ripe. Among the reasons given by the D.C. Circuit was that it was premature for a court to consider the legality of how the government might wield its orderly liquidation authority in a potential liquidation or reorganization.

On the Congressional front, the CFPB’s constitutionality was the focus of testimony given to the Senate Judiciary Committee at a hearing last week entitled “The Administrative State v. The Constitution: Dodd-Frank at Five Years.”  Among the witnesses was Professor Neomi Rao of George Mason University School of Law. In his written testimony, Professor Rao provided extensive support for the position that the CFPB is unconstitutional. According to Professor Rao, because of its “super independence and expansive delegated authority, the CFPB’s structure undermines the Constitution’s checks and balances.”  He also asserted that the CFPB’s “constitutional infirmities have predictably resulted in agency overreach on matters of fundamental importance to the consumer financial marketplace.”  (The written testimony of the other witnesses is available on the Judiciary Committee’s website.)

 Read additional articles at Ballard Spahr’s CFPB Monitor

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