Why it matters

Is the Consumer Financial Protection Bureau (CFPB) constitutional? After other courts across the country have found the agency's structure to be valid or ruled that plaintiffs lack standing, one bank's challenge to the CFPB will move forward after the D.C. Circuit Court of Appeals reversed dismissal of the lawsuit. In its suit, Texas-based State National Bank of Big Spring argues that independent agencies must be led by multiple members (such as the five Commissioners of the Federal Trade Commission) and not a single person, as is the case with CFPB director Richard Cordray. The bank also asserted that Congress's broad delegation of authority in the Dodd-Frank Wall Street Reform and Consumer Protection Act that created the CFPB violated the non-delegation doctrine and that President Obama's Congressional recess appointment of Cordray was unlawful. A federal district court tossed the suit for lack of standing but a panel of the D.C. Circuit reinstated the case, holding that Big Spring had standing to sue because some of the products offered by the bank are subject to CFPB regulation—despite the fact the bank has not been subject to an enforcement action by the CFPB. The court declined to revive other claims in the case, including challenges to the Financial Stability Oversight Council and the new liquidation authority granted to other federal regulators under the Dodd-Frank Act.

Detailed discussion

The Dodd-Frank Act established the CFPB. The CFPB is an independent agency that regulates consumer financial products and services and is headed by a single director.

Texas-based State National Bank of Big Spring filed suit challenging the constitutionality of the new agency on multiple grounds. The bank asserts that independent agencies must be headed by multiple members rather than by a single person and that the broad delegation of authority to the CFPB violated the non-delegation doctrine.

The bank also contested the constitutionality of President Barack Obama's appointment of director Richard Cordray. The Senate did not act on the President's nomination of Cordray for six months, so President Obama used his recess appointment power to appoint Cordray during a three-day intra-session Senate recess. Relying on the U.S. Supreme Court's decision in NLRB v. Noel Canning, State National argued that Cordray's appointment was unlawful.

Also unconstitutional: the Financial Stability Oversight Council (FSOC) created by the Dodd-Frank Act, which possesses statutory authority to designate certain "too big to fail" financial companies for additional regulation.

Eleven state Attorneys General (Alabama, Georgia, Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, and West Virginia) joined State National's lawsuit, challenging the Dodd-Frank Act's grant of new liquidation authority to the Federal Deposit Insurance Corporation (FDIC), Department of the Treasury, and the Federal Reserve Board of Governors on the basis that the new authority violates both non-delegation and due process principles. The states contended that they had standing to challenge the law because the possibility that the government might exercise its new liquidation authority in the future has caused the value of the states' investments in bank-issued securities to be worth less.

At the federal court level, a judge dismissed the suit, finding that none of the plaintiffs had standing and that their claims were not ripe. On appeal to the D.C. Circuit Court of Appeals, a three-judge panel reversed dismissal of some of the claims.

State National "is not a mere outsider asserting a constitutional objection to the Bureau," the court said. "The Bank is regulated by the Bureau."

For example, the CFPB promulgated the Remittance Rule in 2012, imposing disclosure requirements on institutions that offer international remittance transfers—a product provided by State National Bank. "The Bank indeed alleged that it must now monitor its remittances to stay within the safe harbor, and the monitoring program causes it to incur costs," the panel wrote, satisfying the injury-in-fact requirement for standing.

As for ripeness, the panel said "it would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating entity."

Similarly, the bank had standing to contest Cordray's recess appointment, the court held, with the same reasons satisfying the ripeness issue. The court did not consider the impact of Director Cordray's eventual Senate confirmation and his subsequent ratification of the actions that he took while serving under the recess appointment, leaving that to the district court.

However, the court affirmed the lower court's ruling that the bank lacked standing to challenge the FSOC. State National has not been designated as an entity too big to fail, but one of its competitors has been. State National argued that it was indirectly harmed because the designation gives their competitor a reputational subsidy and allows them to raise money at lower costs than it otherwise could, negatively impacting State National's ability to compete.

But the panel found the "novel theory" of reliance on competitor standing was not sufficient to satisfy the standing requirement. "The Bank cites no precedent suggesting that a plaintiff has standing to challenge a regulation that merely imposes enhanced regulatory burdens on the plaintiff's competitor," the court wrote. "[T]he link between (i) the enhanced regulation of the competitor, (ii) any alleged reputational benefit to them, and (iii) any harm to State National Bank is simply too attenuated and speculative to show the causation necessary to support standing."

Finally, the court considered whether the states had standing to object to the Dodd-Frank Act's orderly liquidation authority, namely that the orderly liquidation authority could deprive them of uniform treatment mandated by the Bankruptcy Code if one of the companies they are invested in is liquidated or reorganized by the government.

Finding several problems with the theory, the court explained that it required multiple "ifs": "the State plaintiffs will be affected by the orderly liquidation authority only if a company in which they are invested is liquidated or reorganized by the Government, and only if the States are then treated different from other similarly situated creditors."

"[B]y the State plaintiffs' logic, virtually any investor could raise a pre-bankruptcy constitutional challenge to any bankruptcy-related statute, on a theory that the value of the investor's investments would be higher if the challenged provision were deemed unconstitutional," the court said. Accordingly, the states lacked standing to pursue their constitutional claims and such claims were not ripe for review.

The panel remanded the case for the Bank and the CFPB to brief the merits of the surviving constitutional challenges.

To read the opinion in State National Bank of Big Spring v. Lew, click here.