The Consumer Financial Protection Bureau Is Challenged as Unconstitutional

02 July 2012 Consumer Class Defense Counsel Blog

This past Thursday, June 21, 2012, the State National Bank of Big Spring (“National Bank’”), the Competitive Enterprise Institute (“CEI”), and the 60 Plus Association, Inc. (“the Association”), filed suit against the Consumer Financial Protection Bureau (“CFPB”), the U.S. Department of the Treasury and various financial officials, including Richard Cordray, Director of the CFPB, in their official capacities. In a 32- page Complaint, the Petitioners railed against what they characterized as the unchecked power of the CFPB and the “chilling effect” its operation would have on small financial institutions. The Petitioners challenged the CFPB on three separate grounds: (1) violation of the separation of powers for failure to provide any meaningful checks and balances on the CFPB; (2) violation of the Appointment Clause for fraudulently appointing Mr. Cordray; and (3) violation of the separation of powers for failure to provide any meaningful checks and balances on the Financial Stability Oversight Council (“FSOC”).

According to the complaint, the language of Title X of the Dodd-Frank Act leaves many terms such as “unfair” and “deceptive” undefined; choosing instead to give the CFPB broad authority to define both the practices that will be covered and its role. Moreover, the Petitioners also find fault with the broad investigative authority given to the CFPB. The thrust of their argument is the lack of oversight by any entity, whether it be the President, the Congress, the courts or the Federal Reserve Board (“FRB”).  In their view, the President has no oversight because pursuant to Sec. 1011(b)(1)-(2) the President can only remove the CFPB Director for “inefficiency, neglect of duty, or malfeasance in office.” On the legislative side, the complaint argues that the Congress has no”power of the purse” given that the CFPB is funded through the Federal Reserve System. With respect to judicial oversight, they argue that judicial scrutiny is severely limited by the deference that the Court must show the CFPB’s decisions and regulations. And, even though the CFPB is housed within the FRB, the agency has no review authority over the CFPB.

The Complaint expressed that this unchecked authority creates uncertainty that injures small business. In particular, the National Bank alleges that it has been injured by having to leave the mortgage market entirely to avoid the high costs of compliance with the unpredictable regulations of the CFPB. In fact, it argues that the CFPB’s recent final rules have already forced them to cease offering remittance transfer services to its customers.

The Complaint also alleges that Mr. Cordray was improperly appointed as CFPB Director. The Petitioners argue that the President could not have made a recess appointment when the Congress was not in recess. The complaint highlights an unprecedented move by the President done to overcome Senate Republicans blocking of the confirmations of various administration appointees; a maneuver that successfully left the CFPB without a director for six months.

Lastly, the Petitioners also challenge the Financial Stability Oversight Council, a council comprised of the key financial regulators for the monitoring the nation’s financial system. The complaint finds issue with the Council’s “unbridled discretion” to determine which non-banking financial companies would be considered “systematically important.” This designation, they argue, would give these companies an unfair advantage and drastically undercut small financial institutions like the National Bank.

The Petitioners form an interesting coalition. The National Bank is a local Texas community bank. The Association and CEI, located in Virginia and the District of Columbia respectively, are conservative, non-profit advocacy organizations that support the ideals of free markets and limited government regulation. Jim Purcell, CEO of State National Bank, states that “Dodd-Frank effectively gives unlimited regulatory power to this so-called Consumer Financial Protection Board, also known as CFPB, with a director who is not accountable to Congress, the President or the Courts. That is simply unconstitutional.”

It remains to be seen how the District Court will handle the first major challenge to the CFPB, but most commentators view this as a political move unlikely to be successful. Jen Howard, a spokeswoman for the consumer bureau, said the lawsuit “appears to dredge up old arguments that have already been discredited.” Others, like George Washington University professor, Jonathan Turley, believe there is a realistic chance that Mr. Cordray’s appointment will be overturned.

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