On August 1, 2013, efforts to challenge the constitutionality of the Consumer Financial Protection Bureau (CFPB) were dealt a blow when the U.S. District Court for the District of Columbia dismissed an action against the CFPB because the plaintiffs lacked Article III standing.
In State National Bank of Big Spring et al., v. Jacob J. Lew et al., Civil Action No. 12-1032 (ESH), 2013 U.S. Dist. LEXIS 108308 (Dist. D.C.) (2013), the State National Bank of Big Spring, and two conservative organizations – 60 Plus Association, Inc. and Competitive Enterprise Institute (collectively “private plaintiffs”) – challenged Title X of Dodd-Frank, which established the CFPB.1 The complaint also challenged Title I and Title II, which established the Financial Stability Oversight Council (FSOC) and the Orderly Liquidation Authority (OLA), respectively.2
Specifically, the private plaintiffs alleged that the CFPB violates the separation of powers clause because it remains free from meaningful checks by the Legislative, Executive and Judicial Branches.
In the motion to dismiss, defendants argued that the private plaintiffs lack standing. They also argued that the claims were not ripe for adjudication.
The main focus of the Court’s analysis concerned whether the bank had standing to assert its claims. Specifically, the Court considered whether the bank suffered an injury in fact rather than a hypothetical injury, whether the injury was traceable to the defendant’s challenged conduct and whether the injury may be redressed by a favorable decision.
The bank unsuccessfully argued that it suffered four financial injuries. First, the bank alleged that it sustained a financial injury in the form of substantial compliance costs. These compliance costs included the costs of learning about the CFPB’s regulatory and enforcement activities. Notably, these costs were incurred to determine whetherthe bank was required to comply with Dodd-Frank updates.
In rejecting the bank’s argument, the Court found that compliance costs include the cost that a regulated party undertakes to satisfy a legal mandate – not the cost a party undertakes to determine whether it needs to satisfy a legal mandate. In other words, the Court determined that the costs complained about were actually ordinary costs of doing business, not compliance costs.
The bank even went as far as to argue that it incurred a financial injury in the form of a subscription fee that it paid to receive Dodd-Frank updates. The Court rejected this argument on grounds that the Dodd-Frank updates were actually provided by a trade association. And although the updates were inspired by Dodd-Frank, the updates covered additional federal and state regulations.
Second, the bank argued that it suffered an Article III injury under the CFPB’s Remittance Rule, which allegedly constrained its remittance business.3 The bank stopped offering remittances when the initial rule was promulgated. It began offering remittances once the safe harbor rule – which protects institutions that provide 100 or fewer remittances – was adopted. The bank argued that it was forced to adopt a new policy which constrained its business because it was precluded from offering more than 99 remittances a year.
But the Court found that no injury exists because the rule was not effective at the time the complaint was filed. And the Court noted that where an administrative process is ongoing, there is no impending injury. Although a plaintiff need not necessarily wait for the effective date to challenge a regulation, there is no “certainly impending” injury where the administrative process is ongoing. For similar reasons, the Court determined that the bank’s argument regarding the Remittance Rule was not ripe for adjudication.
Third, the bank alleged an injury on grounds that the CFPB’s rules governing mortgage foreclosures increase cost of doing business. Here, the bank challenged the RESPA Servicing Rule and the Ability to Repay – Quality Mortgage Rule (“ATR-QM Rule”). The Court rejected the bank’s argument because it filed the lawsuit before the promulgation of these rules. In fact the bank did not take issue with these rules in the complaint, but rather its memo in opposition to the motion to dismiss. Because the rules were not in existence at the time of filing, no actual or imminent injury existed when the suit was filed.
Further, the Court determined that even if the rules were in existence at the time of filing, the bank’s injuries were too speculative. Under the RESPA Servicing Rule, a mortgage must be more than 120 days delinquent before a judicial or non-judicial foreclosure proceeding is instituted. The bank claimed that this rule increased its costs because it drew out the process to recover on a defaulted loan. The Court found that the bank exited the mortgage market in 2010 and did not initiate a single foreclosure during 2008-2012. Accordingly, there was “substantial doubt” that the bank would ever issue a notice in less than 120 days.
Under the ATR-QM Rule, small creditors receive a rebuttable presumption of compliance with the rule on first-lien loans to 3.5 percentage points above the APR. The bank claimed that it was being prevented from re-entering the mortgage market because the ATR-QM Rule would affect the bank’s cost and loan structure. The Court rejected this argument because it determined that the bank only held three loans that exceeded the prime rate by 3.5 percent. The Court likewise reasoned that if the bank were to re-enter the market it would likely only offer a small number of these loans. Further, there was no way to know whether any defaulting borrowers would raise the ATR-QM Rule as a defense to foreclosure.
The Court also observed that the bank’s claim under the ATR-QM Rule faced a redressability issue. The Court noted that even if the CFPB were invalidated, its TILA rulemaking authority, which implements the ATR-QTM Rule, could merely revert to the Federal Reserve.
Additionally, the Court discouraged involvement at this time since the ATR-QM is still a work in progress. The CFPB is currently reviewing public comments.
Finally, the bank alleged that it had standing to challenge the CFPB based on its Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) authority. Here, the bank argued that it left the consumer mortgage business to avoid the likelihood of a CFPB-driven prosecution and to avoid any necessary alterations to its mortgage lending practices. It also claimed that but for the existence of the CFPB, its rules and enforcement authority, the bank would reenter the consumer mortgage market.
In rejecting the banks’s argument, the Court held that the bank did not have an Article III injury because its decision to leave the consumer mortgage market did not create an injury in fact. When the bank opted to exit the mortgage market, the CFPB had yet to undertake any enforcement action. Accordingly, the bank’s decision to exit the consumer mortgage market was self-inflicted. And the Court held that an injury does not exist if a party fears a hypothetical harm created by the CFPB’s regulatory and enforcement powers.
The bank also claimed that a lack of certainty existed as to whether the CFPB would investigate or litigate the bank and/or deem its mortgage practices to be in violation of UDAAP under an ex post facto interpretation of the law.
The Court rejected this argument because it found no evidence that the CFPB has the power or intent to engage in ex post facto enforcement activities.
What’s more, the bank argued that an injury exists if an agency’s action causes a plaintiff to be exposed to risks, which in turn affect the plaintiff’s business decisions. Again, the Court rejected the argument because it found no credible threat of actual enforcement – only the bank’s concern about a hypothetical enforcement action.
In addition to its financial injury argument, the bank attempted to establish standing on grounds that it was directly regulated by the CFPB. But the Court disagreed. It found that no case stands for the proposition that standing is established by being subject to regulatory authority in the absence of an agency action that causes injury.
In a footnote, the Court held that Competitive Enterprise Institute and 60 Plus lacked standing because their alleged injuries amounted to “generalized grievances.”
In Count II of the Complaint, the private plaintiffs challenged the appointment of Richard Cordray as CFPB director because he was appointed without the Senate’s advice and consent, which is in violation of the Appointments Clause of the U.S. Constitution. The Court discarded this argument because the bank failed to demonstrate how it was harmed by a decision made by Cordray or under his direction.
On August 2, a Notice of Appeal was filed with U.S. Court of Appeals.