The reasons the CFPB may be unconstitutional

Posted on 11/19/2015 at 08:00 AM by John Lande

This is the second in a three-part blog series on the CFPB. On November 6, 2015, State National Bank of Big Spring (Bank) filed its motion for summary judgment arguing that (1) the Congress unconstitutionally delegated too much authority to the CFPB and (2) that rules issued by the CFPB from January 4, 2012, to July 16, 2013, are invalid. This blog recently covered the briefing schedule for the parties, and with the filing of the Bank's motion we get the first look at the parties arguments challenging the CFPB.

The Bank's arguments on each of the issues are explained separately below. Congress Unconstitutionally Delegated Authority to the CFPB The Bank asserts there are defects with the portion of Dodd-Frank that creates the CFPB. First, the Bank asserts that the CFPB is essentially supplants the President and therefore unconstitutionally takes over the role as the chief executive of the United States for the administration of consumer protection laws. According to the Bank, the CFPB's director is a mini-President who is wholly protected from any direction from the President. Congress did not provide any statutory check on the CFPB director's authority, and, in fact, the President must even defer to the rules and decisions rendered by the CFPB. Second, the Bank asserts the CFPB is unconstitutional because the CFPB enjoys full independence from Congress. The Bank takes issue with the fact that the CFPB is funded not by Congress but by hundreds of millions of dollars from the Federal Reserve. According to the Bank, disconnecting the CFPB form Congress is contrary to the Constitution because the Constitution entrusts Congress alone with the power to make appropriations. This power of purse is the primary means by which Congress can regulate agencies and when it is unavailable to Congress has no effective means of controlling the CFPB. According to the bank, the CFPB is, in effect, a fourth branch of government that is wholly independent of Congress and the President.

CFPB Rules Are Invalid As noted by this blog, President Obama's recess appointment of Richard Cordray was unconstitutional. This means that from January 4, 2012, to July 16, 2013, the CFPB did not have a director. The Bank argues that the CFPB rules promulgated during that period are invalid because the CFPB could not have complied with the legal requirements for agency rulemaking. The Bank further argues that the CFPB's ratification, previously covered by this blog, of its rules after the Senate confirmed Mr. Cordray also did not comply with the  law governing agency rulemaking. According to the Bank, Mr. Cordray does not have the statutory authority to retroactively ratify CFPB rules. The United States will have until December 21, 2015, to file its response. This blog will continue to cover this case because of its potential impact on financial institutions' compliance burden.

Part Three of this blog series, What Happens if the CFPB Couldn't Issue Rules? will be published on Thursday, December 3rd, 2015.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- John Lande

Categories: John Lande, Banking Law


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