AGs Fight to Preserve Lawsuit Against Dodd-Frank

WASHINGTON — The 11 state attorneys general who have joined a lawsuit against the Dodd-Frank Act are arguing for their case to be heard despite a request by the government to dismiss the suit.

In a response filed late Wednesday, the attorneys general rejected the government's claim that they "lack standing" before the U.S. District Court for the District of Columbia.

The AGs are specifically targeting Title II of the Dodd-Frank law that gives the Treasury Department and Federal Deposit Insurance Corp. power to seize and dismantle large banks and nonbanks.

The AGs argue that such authority is unconstitutional because it goes outside the traditional bankruptcy process and could hurt state pension funds, among other actions. "The state plaintiffs have been and continue to be directly and actually injured by Title II's modification of the bankruptcy laws," the response stated. "The states — including state workers' pension funds — invest in the debt of financial companies that could be liquidated under Title II."

The case received a boost in mid-February after eight attorneys general joined the three that had signed on to the case in September.

The AGs are just focused on the part of the case targeting orderly liquidation authority, but the lawsuit itself is much broader, including three private parties who are also questioning the constitutionality of the Financial Stability Oversight Council and the Consumer Financial Protection Bureau.

The private parties also filed a response Wednesday against the government's motion to dismiss. Regulators and other observers previously argued that the sole community bank on the case, State National Bank of Big Spring in Texas, is not harmed, especially since its $327 million-asset size falls well below the CFPB's oversight.

But in the recent response, the bank argues it has incurred compliance costs because of the CFPB and is at a competitive disadvantage because Dodd-Frank codifies "too big to fail."

"The formation and operation of the [CFPB] has substantially increased" the bank's "compliance costs, imposed new costs on the management of its outstanding mortgages and forces it to exit two profitable lines of business," the response stated. "The authority of the [FSOC] to designate non-bank financial institutions with which SNB competes for scare capital as 'systemically important' — and thus government-backed — imminently threatens SNB with competitive harm."

The defendants, which include every federal bank regulator, must reply by April 9.