[author: Keith R. Fisher]

Last Thursday, amidst an inordinate amount of deliberately sought publicity, a lawsuit was filed challenging the constitutionality of the CFPB itself, of the Financial Stability Oversight Council (FSOC), as well as that of the recess appointment of Richard Cordray as Director. State National Bank of Big Spring, Texas, et al. v. Geithner, et al.,  No. 1:12-cv-01032-esh. The case is a bold court challenge to some of the more controversial aspects of the Dodd-Frank Wall Street Reform & Consumer Protection Act, namely Titles I and X. The case is, however,  hampered — perhaps fatally — by the plaintiffs’ questionable standing to bring these claims; the asserted injury in fact mandated by the “case or controversy” clause of the Constitution seems rather attenuated. 

The plaintiffs are a small ($275 million) national bank in Texas, and two non-profit organizations in the metropolitan Washington, D.C. area: the 60 Plus Association, a 7-million member seniors advocacy organization, and the Competitive Enterprise Institute, a conservative public-interest organization. (Injury in fact to the latter two plaintiffs, or their members, seems rather remote). Defendants include the Treasury Secretary, the Comptroller of the Currency, the Chair and Acting Chair of the Federal Reserve Board and the FDIC, respectively, CFPB Director Cordray, the CFPB itself, the Chairs of the SEC, CFTC, and NCUA, the FSOC, and a member of the FSOC. 

The complaint, which reads in places more like a brief than a set of factual allegations, advances a number of constitutional claims. First, it challenges the constitutionality of the Bureau because (A) it is variously described in the Dodd-Frank legislation that created it as an “Executive agency” and an “independent bureau” that is “established in the Federal Reserve System”; (B) it has authority to regulate and bring enforcement actions against UDAAP without the legislation defining what “unfair,” “deceptive,” and “abusive” practices are; (C) it has jurisdiction over “myriad pre-existing ‘Federal consumer financial laws’” previously administered by other federal agencies; (D) it has supervisory authority with respect to many diverse entities subject to federal consumer protection laws; (E) it has “aggressive investigation and enforcement powers”; and (F) it operates and exercises the foregoing broad (and sometimes undefined) powers without being subject to any checks and balances, including Congress’s “power of the purse” or unrestricted power on the part of the President to fire the Director, and operates under statutory authority requiring the same degree of judicial deference to its interpretations of Federal consumer financial laws that would obtain “if the Bureau were the only agency authorized to apply, enforce, interpret, or administer the provisions of such Federal consumer financial law.” (In my view, the purpose of this statutory deference provision (Dodd-Frank § 1022(b)(4)(B)) seems intended merely to accord Chevron deference to such interpretations in the wake of decisions refusing to do so where multiple agencies are empowered to interpret the same language). 

With respect to some of these claims, it is difficult to discern what constitutional infirmity being alleged. Item (C), for example, seems merely a basis for asserting injury in fact (requisite for standing) to the plaintiff bank, though the particulars here seem somewhat flimsy. The allegation is that the CFPB promulgated a rule imposing new disclosure and compliance requirements with respect to international remittance transfers. The complaint alleges that these increase the cost of providing those services to the bank’s customers “to an unsustainable level,” as a result of which the bank decided to cease offering these services. Apart from the unlikelihood that an unduly large amount of international remittance business would be generated in Big Spring, Texas, it would seem that the increased compliance cost would affect all banks equally, making this the sort of generalized injury that does not confer standing upon taxpayers invoking injury based on that status.  One would normally assume, moreover, that the marginal increased compliance cost would be passed on to customers, as is the case with most regulatory compliance costs. In any event, the compliant fails to allege that the bank has actually lost revenues as a result of discontinuing this service and that it would have lost revenues. 

With respect to the “power of the purse” allegation on Item (F), note that the other federal bank regulators — the Federal Reserve, the FDIC, and the OCC — are also funded independently from the congressional appropriations process, and the appointments of the Comptroller, FDIC board members, and Fed Governors all exceed the length of a presidential term and that not all of those officials serve at the pleasure of the President. Indeed, a famous New Deal era Supreme Court decision held that FDR acted unconstitutionally when firing a member of an independent agency like the Federal Trade Commission. It goes, perhaps, without saying that these sorts of allegations also represent no more than generalized injuries, rendering dubious the standing of these plaintiffs. 

The complaint does not mention that the plaintiff bank, being considerably less than $10 billion in assets, is not generally subject to examination by the Bureau. 

As part of its effort to assert standing, the bank also alleges that it exited the consumer mortgage lending business in October 2010 because of “regulatory uncertainty” stemming from what is characterized as an open-ended grant of authority to the Bureau in this area. Lots of regulated entities operate under regulatory uncertainty, however. Exiting the business seems like an extreme solution, and was not in any event mandated by any final agency action of the Bureau. Indeed, the bank appears to have exited at least 9 months before the statutory transfer date and well over a year before the Bureau had a Director and commenced regulating. 

The complaint also alleges that the ability of the FSOC, established pursuant to Dodd-Frank Title I, to designate certain institutions as “systemically significant” gives them a funding advantage over smaller institutions like the plaintiff bank. In general, however, the same institutions that would qualify as SIFIs under Dodd-Frank were already considered by “too big to fail” and enjoyed the same funding advantage. This, too, would be a generalized injury. Apparently to get around that problem, the complaint displays some ingenuity by focusing solely on the designation of nonbank systemically significant entities as creating even more entities with a funding advantage. The complaint also challenges the lack of meaningful judicial review of such FSOC determinations and the absence of a private right of action to challenge them. The question remains, however, whether conclusory allegations without any demonstration of specific injury are enough either to confer standing or to survive a motion to dismiss in the era of heightened pleading requirements after the Supreme Court’s Twombly and Iqbal decisions.

Finally, the complaint challenges the validity of the recess appointment of Director Cordray, about which I have previously blogged here and here. We have noted the unavailability of standing to bring such a challenge until someone could establish injury in fact resulting from final agency action by the Bureau. This complaint falls short of alleging any such final agency action affecting the bank, and merely challenges the appointment based on the lack of a Senate “recess” during the period in question. 

We anticipate the filing of a motion by the Justice Department to dismiss the complaint in the near future and will follow future developments with interest.