CFPB still isn't home free: Federal Court revives challenge to constitutionality of CFPB

John Lande Iowa Banking Law Dickinson Law Des Moines Iowa

Posted on 08/03/2015 at 09:26 AM by John Lande

On July 24, 2015, the United States Court of Appeals for the D.C. Circuit revived a challenge to the CFPB's very existence. This blog previously discussed this case State National Bank of Big Spring v. Jacob Lew shortly after it began in 2012. The case challenges the CFPB and the Dodd-Frank Act in four ways. First, Texas-based State National Bank asserts that Congress delegated too much of its legislative authority to the CFPB. The bank argues that Congress gave the CFPB too much discretion.

The Constitution requires Congress to write laws. When writing a law, the Supreme Court has ruled that Congress can allow executive agencies, such as the CFPB, a certain amount of discretion when writing regulations to interpret congressional intent. However, the Supreme Court has made clear that Congress can't cede all of its authority to an agency. Rather, Congress must set forth an intelligible principle to guide agency action. An intelligible principle will set the boundaries for agency action. An agency is free to write rules within those boundaries, but it cannot exceed the authority Congress bestowed on it. According to State National Bank, Congress ceded too much authority to the CFPB, and thus failed to set boundaries for the CFPB’s rulemaking authority. There is precedent for this kind of argument, however the last time an entity successfully challenged congressional delegation of authority in the United States Supreme Court was 1935. Second, State National Bank asserts that President Obama unconstitutionally appointed the CFPB’s director, Richard Cordray. As this blog has previously covered, the Supreme Court has already ruled that President Obama’s appointment of an NLRB official was unconstitutional. The NLRB appointment occurred at exactly the same time as Mr. Cordray's appointment. Third, the lawsuit challenges the Dodd-Frank Act's creation of the Financial Stability Oversight Council (FSOC). As with the challenge to the CFPB, the plaintiffs claim Congress delegated too much authority to FSOC over entities deemed too big to fail. Fourth, the lawsuit challenges the Dodd-Frank Act's liquidation authority granted to the FDIC.

The States of Alabama, Georgia, Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, and West Virginia (the States) assert this last challenge to the CFPB. This case was dismissed by the district court in 2013 because neither State National Bank nor the States had legal standing to challenge the CFPB, FSOC, or any of the authority granted by the Dodd-Frank Act. In other words, the district court concluded that State National Bank and the States had not suffered any actual legal harm. Since they hadn't actually suffered any harm, any challenges to the CFPB, FSOC, and the Dodd-Frank Act were premature. The Court of Appeals for the D.C. Circuit reversed the decision of the District Court as to State National Bank on its first two claims. The Court concluded that State National Bank does not have to wait for CFPB regulations to cause it harm. The D.C. Circuit affirmed the district court's conclusion that State National Bank's challenge to FSOC, and the States’ challenge to Dodd-Frank's liquidation authority are premature.

The ruling came from a three-judge panel of the D.C. Circuit. The judges on that panel were appointed by presidents Bill Clinton, George W. Bush, and Barack Obama. The case will now return to the district court so State National Bank can have a trial on its first two claims whether Congress delegated too much authority to the CFPB and Richard Cordray's appointment was unconstitutional. State National Bank is almost certain to prevail on the second claim because the United States Supreme Court has already ruled that President Obama did not have authority to appoint an NLRB official at the same time he appointed Mr. Cordray. However, the defendants, including the CFPB, have 45 days to appeal the decision to the full D.C. Circuit, or 90 days to file for review before the United States Supreme Court. Given the posture of the case, it isn't clear what the CFPB's next move will be.

As always, this blog will continue to monitor the progress of the case as it could have significant implications for the administrative rules promulgated by the CFPB and banks' future compliance burdens.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

Categories: Banking Law, John Lande

 

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