WASHINGTON — Two years after a legal challenge to the Consumer Financial Protection Bureau's constitutionality was dismissed by a federal court, the case is unexpectedly back from the dead.
The D.C. Circuit court reopened Texas-based State National Bank of Big Spring's case against the CFPB, concluding it has legal standing to sue despite the fact that it is not directly supervised by the agency.
The court said the $340.5 million-asset bank's claims that the CFPB should be run by a commission rather than a single director and that CFPB Director Richard Cordray was improperly appointed during a Congressional recess could move forward. It dismissed other claims, including those that questioned the legal power of the Financial Stability Oversight Council and new powers granted by the Dodd-Frank Act to allow regulators to unwind large, failing institutions.
"The bank is not a mere outsider asserting a constitutional objection to the bureau. The bank is regulated by the bureau," wrote Circuit Court Judge Brett Kavanaugh in an opinion approved by the three-judge panel. "State National Bank offers and provides consumer financial products and services. The bureau has already exercised its broad regulatory authority to impose new obligations on banks, including State National Bank."
At issue is whether State National Bank has legal standing to challenge the CFPB, given that the agency only directly oversees institutions with less than $10 billion of assets and is not fighting an enforcement action with the agency. But Kavanaugh argued that because the CFPB's rules are on financial products that can be offered by a bank of any size, State National Bank is effectively overseen by the agency.
The judge cited the CFPB's remittance rule, which covers all banks and thrifts but does allow a "safe harbor" for institutions which do smaller amounts of international money transfers.
"The rule also offers a safe harbor, but banks such as State National Bank must incur costs to ensure that they are properly complying with the terms of that safe harbor," Kavanaugh said. "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. There is no doubt that the bank is regulated by the bureau ... the bank therefore has standing to challenge the constitutionality of the Bureau."
The case was initially dismissed in 2013 because a court ruled it was not yet "ripe" since the agency hadn't brought an enforcement action or taken other steps against the bank. But Kavanaugh rejected that logic.
"As the Supreme Court stated in Free Enterprise Fund, 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 agency," Kavanaugh said. "To use the Supreme Court's words, we 'normally do not require plaintiffs to bet the farm' by violating the law in order to challenge the constitutionality of the regulating agency ... In short, the Bank has standing to challenge the constitutionality of the Consumer Financial Protection Bureau, and the case is ripe."
State National Bank, along with two conservative groups, also challenged the process of President Obama's initial recess appointment of Cordray to serve as director of the CFPB (Cordray was later confirmed by the Senate).
Kavanaugh said the bank has the right to challenge Cordray's recess appointment in the same way it can challenge the constitutionality of the agency.
"In considering the bank's claim, we leave it to the District Court to consider the significance of Director Cordray's later Senate confirmation and his subsequent ratification of the actions he had taken while serving under a recess appointment," Kavanaugh said.
Kavanaugh rejected, however, another claim by the plaintiffs in which they challenged the constitutionality of the FSOC. The circuit court determined the bank did "not have standing to assert that claim" largely because it is a not a systemically important entity and is not directly affected by FSOC's actions, nor could it support its standing of being a competitor to a designee.
Still, the lead plaintiffs immediately took the overall opinion as a "win" for their case, which has received little attention since being rejected in August 2013.
"As a small community bank out in West Texas, we've always felt pretty vulnerable to the regulatory burdens imposed on us by Washington, DC. In recent years, that threat was epitomized for us by the Consumer Financial Protection Bureau, an agency which was alarmingly free of traditional checks and balances," said Jim Purcell, chairman of State National Bank, in a press release. "We never quite understood why the Bureau objected to having its constitutionality tested in court. On behalf of the bank, its customers, and the American public, we're extremely gratified that we'll now have the chance to put this agency to that test."
There is also a fourth, separate claim that was brought on by nearly a dozen states that challenges the liquidation authority that Dodd-Frank gave to the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corp. in order to take apart failing companies that pose a systemic risk to the financial markets.
The states argued that the orderly liquidation process could strip away their current uniform treatment that their state funds and pensions receive as a certain creditor in a bankruptcy process. As a result, the states said their current investments are worth less because of the liquidation authority.
The circuit court determined that the claim made by the states had no standing largely because it was based on assumptions.
"It is premature for a court to consider the legality of how the Government might wield the orderly liquidation authority in a potential future proceeding," Kavanaugh said. "The State plaintiffs have not sufficiently alleged or demonstrated that their current investments are worth less now, or have been otherwise adversely affected now, because of the Government's new orderly liquidation authority. Moreover, by 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 other two judges who were presented with the case alongside Kavanaugh were judges Judith Rogers and Cornelia T.L. Pillard.