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CFPB Strikes Back at Legal Challenge With Motion to Dismiss

Joe Mont | November 29, 2012

The Consumer Financial Protection Bureau has taken its opening shot against a legal challenge to its authority.

In June, State National Bank of Big Spring et al. v. Timothy Geithner et al. (in his official capacity as Secretary of the Treasury and Chairman of the Financial Stability Oversight Council) was filed in U.S. District Court for the District of Columbia. Parties to the suit included the 60 Plus Association and Competitive Enterprise Institute. In September, an amended complaint added the Republican state Attorneys General of South Carolina, Oklahoma, and Michigan.

The complaint says legislative aspects of the CFPB's creation were unconstitutional and that Director Richard Cordray's Jan. 4, 2012 recess appointment by President Barack Obama should be dismissed because Congress was not technically adjourned at the time it was made. Other arguments are that the CFPB has too much independence (because Congress cannot set its budget), that the President cannot remove the CFPB director except in special circumstances, and that courts are expected to give CFPB decisions extra deference.

The Attorneys General added themselves to the case to challenge the Dodd-Frank Act's Orderly Liquidation Authority, which gives the Treasury Secretary the ability to liquidate financial companies if doing so is deemed necessary by regulators.

The CFPB's Motion to Dismiss argues that none of the plaintiffs have standing or can prove injury. “Despite the roving allegations of unconstitutionality set forth in the Amended Complaint, not one of the statutorily authorized actions that Plaintiffs speculate might someday cause them harm has yet occurred,” it says.

Lead plaintiff State National Bank of Big Spring (SNB) claims the Bureau's authority to enforce Dodd-Frank's prohibition on “unfair, deceptive, or, abusive practices” (UDAAP) created a “chilling effect” on its consumer lending practices and caused it to cease mortgage lending in October 2010. “But the Bureau has no authority to enforce the UDAAP prohibition against [the bank],” the motion counters, explaining that the Office of the Comptroller of the Currency (“OCC”) has exclusive authority to enforce compliance for it. The Bureau's enforcement authority is limited to making recommendations to the OCC and the bank “failed to allege that any such recommendation by the Bureau has occurred or is imminent.”

SNB also suffered no injury from the designation of certain financial companies as Systemically Important Financial Institutions (SIFIs) that will be subject to more stringent government regulation, the motion adds.

“SNB does not claim that it has been or will ever be designated a SIFI,” it says. “Instead, it attempts to cast a SIFI designation and the heightened federal regulation that accompanies it as a benefit, and then claims that it will suffer a competitive injury because it has not been designated. SNB's asserted injury, however, is based on speculation that one of its direct competitors will someday be designated a SIFI (no such designations have occurred), layered upon speculation that this competitor will receive a cost-of-capital advantage from its creditors as a result of the designation (no entities have received such a benefit), layered upon speculation that this cost-of-capital advantage will outweigh the costs associated with heightened federal regulation (not yet finalized).”

A client advisory from the law firm Ballard Spahr's (which posted the recent Motion to Dismiss here) points out that another pending lawsuit could have implications for the validity of Cordray's appointment. That case, Noel Canning v. National Labor Relations Board, is currently before the U.S. Court of Appeals for the D.C. Circuit.

Canning, a soft drink bottler and distributor, is challenging an NLRB demand that his company to enter into a collective bargaining agreement with a union. The case argues that this action, among others, is invalid because of recess appointments made by President Obama to the Board. In October, Speaker of the House John Boehner and 42 Republican senators filed amicus briefs supporting the contention that the Senate was in a “pro forma” session at the time of the appointments, not in recess.