Saturday, June 23, 2012

Constitutionality of CFPB and FSOC Established by Dodd-Frank Challenged in Federal Court Action

A Texas bank has challenged the constitutionality of the Dodd-Frank Act in federal court, focusing on Title X, which created the Consumer Financial Protection Bureau and Title I, which established the Financial Stability Oversight Council. The main contention is that the sweeping and essentially unlimited and judicially unreviewable powers the Act bestows on the Bureau and the FSOC violates the Constitution’s separation of powers doctrine. State National Bank of Big Spring, et al. v. Geithner, et al., US District Court for the District of Columbia

Thecomplaint states that the Dodd-Frank Act effectively delegates unlimited power to the CFPB to regulate practices that the Bureau deems to be unfair, deceptive, or abusive, thereby granting the Bureau vast authority over consumer financial product and service firms, such as the plaintiff bank.  The Act does not define unfair or deceptive acts or practices, leaving those terms to the CFPB to interpret and enforce either through ad hoc litigation or through regulation. The Act does not provide meaningful limits on what the CFPB can deem an abusive act or practice. While the Act allows the CFPB to define and enforce these standards through rulemaking, noted the complaint, Director Richard Cordray has already announced that the Bureau will define and enforce them primarily through ad hoc ex post facto enforcement. 

The bank contends that Dodd-Frank eliminates the constitutional checks and balances that would ordinarily limit the CFPB’s exercise of these broad and undefined powers, thereby violating the separation of powers doctrine. For example, Congress has no power of the purse over the CFPB, which the Act allows to essentially fund itself by unilaterally claiming funds from the Federal Reserve Board. The Director, who cannot be removed at the pleasure of the President, determines the amount of funding the Bureau receives from the central bank and then the Fed must transfer those funds to the Bureau. In addition to allowing the CFPB to fund itself, alleged the bank, the Act prohibits Congress from even attempting to review the Bureau’s budget.

Judicial oversight is limited by Dodd-Frank provisions requiring the courts to grant the same deference to the CFPB’s interpretation of federal consumer financial laws that they would if the Bureau were the only agency authorized to apply and interpret or administer the provisions of federal consumer financial law. The CFPB’s regulatory authority is further insulated from accountability to the very agency in which it is housed by provisions stating that no regulation adopted by the CFPB can be subject to review of or approval of the Fed.

Similarly, the FSOC is given sweeping power and unbridled discretion to pick which non-bank financial firms are systemically important, thereby subjecting the firm to enhanced federal regulation. The FSOC determination is not subject to meaningful judicial review. While a firm designated by FSOC as systemically important may appeal to a federal district court, noted the complaint, the appeal is limited to the question of whether that determination was arbitrary and capricious. Section 113 of Dodd-Frank forbids the courts to review whether FSOC’s action was in accordance with law.

The bank argues that Title I’s open-ended grant of power and discretion to FSOC, combined with the elimination of judicial review of FSOC’s judgments, and the inclusion of members neither appointed by the President nor confirmed by the Senate, gives FSOC the unfettered discretion to determine which non-bank financial firms are systemically important, violates the separation of powers and is unconstitutional.

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