Appeals Court Revives Texas Bank’s Lawsuit Challenging Constitutionality Of CFPB

This week, the Consumer Financial Protection Bureau celebrates its fourth anniversary of protecting consumers from harmful practices and shady characters in the financial sector. But instead of buying the regulatory arm a big ol’ birthday cake, a federal appeals court is gifting the Bureau with a revived lawsuit challenging its constitutionality.

The U.S. Court of Appeals for the District of Columbia Circuit reversed a trial court’s ruling that threw out a lawsuit filed by a Texas bank arguing the structure of the CFPB is unconstitutional.

State National Bank, which originally filed the suit in June 2012, claims that independent government agencies must be headed by multiple members, rather than a single director.

The CFPB, created as part of the 2010 Dodd-Frank Act following the financial crisis in 2008, is headed by a single director – in this case Richard Cordray – who was appointed to the position by President Barack Obama in 2011.

The panel of three judges ruled [PDF] Friday that State National Bank had legal standing to proceed with its case challenging the formation and operation of the Bureau, because the bank is subject to the agency’s oversight and regulations.

“The Supreme Court has stated that ‘there is ordinarily little question’ that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated,” Judge Brett Kavanaugh, wrote in the opinion.

“The Bank is not a mere outsider asserting a constitutional objection to the Bureau. The Bank is regulated by the Bureau. Under the Dodd-Frank Act, the Bureau ‘shall regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.'”

Despite the court’s ruling that the bank’s challenge had standing, the Wall Street Journal notes, it did not consider the merits of the bank’s constitutional claims, saying that a trial court should consider it first.

The revived suit also challenges the constitutionality of Cordray’s initial appointment to the CFPB directorship. In early 2012, while the Senate was in recess, President Obama appointed Cordray to the post, bypassing the usual Senate confirmation process for high-level federal officials. In 2013, Obama renominated Cordray, who subsequently received Senate approval.

One portion of the lawsuit that did not survive the appeals court was a challenge to the constitutionality of the Financial Stability Oversight Council, which monitors the stability of the U.S. financial system. The appeals court found that State National lacked legal standing to issue this challenge, as the bank has not been designated as “too big to fail,” which would have made it subject to additional regulation.


[via The Wall Street Journal]

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.