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August 24, 2015 • Issue 15:08:02

Appeals court gives green light to CFPB challengers

Score one for opponents of the federal Consumer Financial Protection Bureau. A U.S. Appeals Court in Washington, D.C., recently overturned a lower-court ruling that asserted a Texas bank lacked legal standing to challenge the constitutionality of the federal consumer watchdog agency's governance.

"Although this is a decision that is narrow in scope, it now allows the plaintiffs to litigate a significant issue that has been disputed since the creation of the CFPB – namely, whether the CFPB must be governed by a commission or board rather than one sole director," said Joe Lynyak, a partner in the international law firm Dorsey and Whitney LLP.

The CFPB has been under a cloud of controversy since it was created under the 2010 Dodd-Frank Act. Architects of the law said they wanted an agency that was not accountable to the political whims of Washington. What they got was an "independent" agency accountable to no one, argues State National Bank of Big Spring, Texas. State National is the lead plaintiff in a lawsuit challenging the constitutionality of the CFPB's leadership. Co-plaintiffs include 11 states and several other organizations.

Not the only independent agency

Independent agencies have been part of the federal government since the early 20th century. The Federal Deposit Insurance Corp., Securities and Exchange Commission and Federal Trade Commission are all independent agencies. These agencies are run by committees. The CFPB, however, is headed by a lone individual, appointed by the President. The CFPB's financing comes from Federal Reserve revenues, which accrue from open market operations and clearing payments between financial institutions. Thus, it is out of reach of the congressional budget process.

State National Bank's legal challenge was rejected in August 2014 by the U.S. District Court in Washington, D.C., which ruled that the Texas bank lacked legal standing to challenge the constitutionality of the CFPB. So the bank and its allies challenged that decision in the U.S. Court of Appeals for the District of Columbia Circuit, which handed down the latest decision instructing the lower court to take the case.

"The Bank is not a mere outsider asserting a constitutional objection to the Bureau. The Bank is regulated by the Bureau" by virtue of the fact that it provides consumer credit products, wrote Justice Brett M. Kavanaugh in the decision.

The Appeals Court also upheld the bank's challenge to President Obama's appointment of Richard Cordray to head the CFPB during a congressional recess – an administrative end run to avoid a Senate vote on the appointment. Legal experts, however, said the point is moot since Cordray's appointment eventually was confirmed by the Senate. Additional components of the lawsuit – challenging provisions regarding very large banks and failed bank liquidations – also were rejected by the appeals court.

Fighting for the little guy

But the meat of the case – the constitutionality of the CFPB's governance – should be decided by the District Court, the Appeals Court said. "As a small community bank out in West Texas, we've always felt pretty vulnerable to the regulatory burdens imposed on us by Washington, D.C. In recent years, that threat was epitomized for us by the Consumer Financial Protection Bureau, an agency which was alarmingly free of traditional checks and balances," said Jim Purcell, Chairman and Chief Executive Officer of State National Bank.

Sam Kazman, General Counsel at the Competitive Enterprise Institute, a Washington think tank and a co-plaintiff in the case, said, "Since Dodd-Frank's enactment five years ago this month, the CFPB has inflicted damage on huge segments of our economy. Its powers are so free-roaming that they are unprecedented in our history. The fact that our standing to challenge the CFPB has been upheld is great news for us, the plaintiffs, and even greater news for the American public."

Legal experts agree, however, that the matter is far from settled. Regardless of what the district court finds, the case eventually may have to be settled in U.S. Supreme Court. end of article

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