Appeals Court Revives Lawsuit Challenging CFPB's Constitutionality
Commentary by Bob Zwirb
The U.S. Court of Appeals for the D.C. Circuit ruled that a Texas bank (the "Bank") and other plaintiffs have the legal standing to proceed with a lawsuit challenging the constitutionality of the Consumer Financial Protection Bureau ("CFPB"), as well as the recess appointment of Director Richard Cordray. However, the Court also ruled that the Bank lacked the standing to challenge the constitutionality of the Financial Stability Oversight Council ("FSOC") and Dodd-Frank's grant of authority to the federal government to liquidate failing financial companies that are said to pose risks to U.S. financial stability. The Court held that the Bank could not prove it had been harmed by these Dodd-Frank creations.
The challenge to various provisions of the Dodd-Frank Act was brought by the Bank, joined by 11 state attorneys general and two policy associations. A federal district court concluded that the Bank lacked standing and that it was unable to prove it had been harmed by these two agencies.
On appeal, the D.C. Circuit upheld the Bank's standing with regard to its CFPB constitutional claims, notwithstanding its inability to show a lack of direct harm. The D.C. Circuit noted that the Bank was not challenging an agency rule regulating its conduct, but rather the legality of the existence of the regulatory agency, and that "it would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) so that the regulated entity can challenge the constitutionality of the regulating agency." The Appeals Court, however, upheld the lower court's ruling concerning the Bank's lack of standing with respect to the other two claims. Specifically, the Court rejected the Bank's contention that it suffered harm whenever FSOC designated a competitor as "systematically important," and stated that the charge was "simply too attenuated and speculative to show the causation necessary to support standing."
See: U.S. Court of Appeals D.C. Circuit's Decision; U.S. District Court of D.C.'s Decision.
Related news: Republicans Introduce Bill to Abolish the Consumer Financial Protection Bureau (with Lofchie Comment) (July 21, 2015).
Commentary
The Bank's challenge to FSOC's "systematically important" designation authority was made difficult by the fact that such authority was directed not at the Bank, but rather at "someone else" (i.e., the entities that had been deemed to be systemically significant, such as the American International Group, GE Capital Corporation, MetLife and Prudential Financial). Although this systemically significant designation may be argued to be either a benefit, a burden or both to the designated party, it arguably has an indirect adverse effect on smaller banks like this one, which must compete in the capital markets with institutions that are able to raise money "at lower costs than [they] otherwise could" (as the Bank argues) because of the supposed honor of the systemic significance designation.
One important aspect of this case involves the notion of "cost"; i.e., the price of compliance with various mandates under Dodd-Frank, which the lower court limits to the cost that a regulated party incurs to satisfy a legal mandate, "not the cost the party incurs to determine whether it needs to satisfy a legal mandate." Certainly, one of the huge burdens faced by the market since 2010 has been the cost of interpreting Dodd-Frank, as well as that of interpreting the numerous rules issued pursuant to it in anticipation of compliance when they become fully effective. While such costs do not support the notion of standing for purposes of a legal challenge, they still are substantial and should be taken into account by policy makers who evaluate the law's costs and benefits.