DOJ Fires Back in Case Against CFPB, Dodd-Frank

By Rob Blackwell

NOV 21, 2012 3:04pm ET

WASHINGTON – A Texas bank’s court challenge claiming that the Consumer Financial Protection Bureau is unconstitutional is wildly speculative and baseless, the Department of Justice said this week.

In a filing with the U.S. District Court for the District of Columbia, Justice said that the $285 million-asset State National Bank of Big Spring and its allies, which include three state attorneys general, lacked legal standing to file a lawsuit against CFPB and the Dodd-Frank law that created it.

The bank filed the lawsuit in June claiming, among other things, that pending CFPB regulations concerning mortgages and remittances had caused it to exit those businesses.

Such allegations are critical because in order to have legal standing, the institution must first establish that it has been harmed.

Yet the Justice Department said State National Bank failed that key test.

“Despite the roving allegations of unconstitutionality set forth in the amended complaint, not one of the statutorily authorized actions that plaintiffs speculate might someday cause them harm has yet occurred,” the Justice Department wrote. “Having failed to allege any actual or imminent injury flowing from the challenged provisions of Dodd-Frank establishing the bureau, or from Richard Cordray’s appointment as director of the Bureau, SNB lacks standing to pursue these claims.”

The lawsuit made waves this summer because it was the first legal challenge to Dodd-Frank. Yet it raised eyebrows as well, with many seeing its chances of success as remote at best.

The bank, joined by conservative groups Competitive Enterprise Institute and the 60 Plus Association, claimed that the CFPB and Cordray’s recess appointment as director in January were unconstitutional. They were later joined by the AGs from Michigan, Oklahoma and South Carolina, giving added importance to the case.

But the Justice Department says all six parties lack any legal standing to challenge Dodd-Frank, saying their arguments of harm are based on what regulators might do, rather than what they’ve actually done.

“Plaintiffs’ claims are unripe,” the Justice Department says. “Future Bureau enforcement actions or regulations, future Council designations, and future orderly liquidation processes that affect plaintiffs are contingent upon subsequent events that may not occur as plaintiffs suggest or may not occur at all. Because the court may never need to resolve these claims, they are not fit for judicial resolution.”

In a statement to American Banker, Sam Kazman, the general counsel for the Competitive Enterprise Institute, said waiting until regulators acted would be too late.

“Constitutional litigation. is not a matter of closing the barn door after the horses have bolted and rampaged the town,” he said. “We believe that the issues raised in this case are ripe, and that plaintiffs are entitled to adjudicate them.”

Among other claims, State National Bank argued in its lawsuit that it was forced to exit the mortgage business in 2010 because it was concerned that the CFPB might crack down on it once it promulgates several required mortgage regulations.

But the Justice Department noted that the CFPB does not have enforcement authority for banks with less than $10 billion of assets.

The bank also argued that it stopped offering remittances after the agency finalized a rule in January requiring more disclosures on such products.

But Justice noted that the bank did not demonstrate that it would even be affected by the rule, which only affects institutions that send more than 100 international remittances annually.

It was equally dismissive of broader claims by the bank that the Financial Stability Oversight Council’s designations of certain nonbank financial firms as systemically important – which have not even happened yet – would somehow benefit such companies.

“SNB’s asserted injury, however, is based on speculation that one of its direct competitors will someday be designated a SIFI (no such designations have occurred), layered upon speculation that this competitor will receive a cost-of-capital advantage from its creditors as a result of the designation (no entities have received such a benefit), layered upon speculation that this cost-of-capital advantage will outweigh the costs associated with heightened federal regulation (not yet finalized),” Justice wrote.

“SNB’s long, attenuated chain of guesswork regarding an imagined course of future events is insufficient to constitute a concrete and imminent injury,” it added.

It also rejected broader claims by the state AGs that their state pensions could one day be hurt in a hypothetical wind-down of a systemically important firm by the Federal Deposit Insurance Corp. Justice noted that no such failure has occurred – or even seems likely to occur – and that the states could not prove their pensions would be harmed.

“None of the plaintiffs has been injured by a Bureau regulation, Bureau enforcement action, Council designation, or Title II liquidation, and their subjective and unfounded fears that they might someday be affected by such actions are not enough to invoke this court’s jurisdiction,” Justice wrote.