CFPB Suit Faces Long Odds, But May Still Have Impact

WASHINGTON — Supporters of the Consumer Financial Protection Bureau are dismissing a new lawsuit that seeks to abolish the agency as a political stunt, and even bank industry insiders who would like the case to succeed are privately calling it an uphill battle.

But despite what appear to be long odds, the suit could have an impact on the CFPB's operations in a more indirect way. The litigation could drag on for years, and the case could force the agency to make public statements that have the effect of curtailing its power, observers said.

"Even if the complaint is not successful, it's possible that in responding to the complaint, the CFPB will make statements acknowledging certain limitations on what it can do — so that it could have an impact, a real-world impact, even if it does not ultimately prevail," said Joseph Barloon, a bank industry lawyer at Skadden Arps in Washington.

The case has drawn headlines for its assertion that the CFPB violates the Constitution because the agency lacks sufficient checks and balances on its power, but it also makes two additional attacks on the Dodd-Frank Act.

The plaintiffs allege that the Financial Stability Oversight Council is also unconstitutional. It also argues that the recess appointment of Richard Cordray as the CFPB's director violates the U.S. Senate's constitutional power over presidential nominations.

The case was filed Thursday by a Texas community bank, State National Bank of Big Spring, and two national conservative groups — the Competitive Enterprise Institute and the 60 Plus Association, which positions itself as a conservative alternative to the AARP.

The suit sprung from conservative legal circles in Washington. But the involvement of the Texas bank is critical because a bank can make a more plausible argument for how it has been harmed by parts of the 2010 financial reform law — and therefore for why it should be allowed to sue — than the Beltway conservative groups can make.

The lawsuit comes in the wake of a push by congressional Republicans to reel in CFPB by altering the agency's structure. The GOP last year fought to subject the agency to the congressional appropriations process, to replace its director with a five-member board, and to make it easier for the agency's decisions to be overruled.

But congressional Republicans lost their leverage for those demands when President Obama used a recess appointment to install Cordray as the CFPB's chief.

That context led consumer advocates to dismiss the suit Friday as political sour grapes.

"It looks like opponents of the agency have been shopping a lawsuit to raise the same ideological concerns that they raised in Congress," said Travis Plunkett, legislative director for the Consumer Federation of America. "They're hostile to the notion, and in most cases hostile to specific proposals, to establish an agency focused on consumer financial protection."

Deepak Gupta, a Washington appellate lawyer who formerly served as a CFPB attorney, said that the suit merely recasts political arguments against the agency as constitutional arguments.

"I don't think that these are serious legal theories, and I don't think a court is likely to see them as serious legal theories," he said.

Bank industry lawyers took a different view, saying the case raises substantive legal issues and shouldn't be dismissed out of hand.

"Whether or not they will win, they have an argument," said Oliver Ireland, a partner at Morrison Foerster.

Another industry lawyer who asked not to be identified said, "These are serious issues. What I suspect is that one court may take up one or two of these issues and dismiss the rest of it."

"They've raised a lot of questions, and you never know what's going to stick."

Observers also noted that initial legal judgments, even from experts, can be wrong. In the health-care realm, the argument that the individual mandate is unconstitutional was at first largely dismissed by the legal establishment, and that issue is now seen as a close call at the Supreme Court.

In order to have a chance to make their constitutional arguments, the plaintiffs will first have to establish that they have suffered harm, and therefore have the legal standing, to sue.

In the complaint, the plaintiffs allege that State National Bank of Big Spring has suffered two specific harms related to the CFPB. The bank states that it stopped offering remittance services to its customers as a result of a February 2012 rule issued by the CFPB regarding international remittance transfers.

The bank also alleges that it exited the mortgage business because of regulatory uncertainty stemming from what it calls an open-ended grant of authority to the CFPB.

The Texas bank's argument for how it has been harmed by the Financial Stability Oversight Council is less direct.

The bank alleges that the Council's ability to designate certain nonbanks as systemically important will convey to investors that those firms are too big to fail, which will give them a funding advantage in the marketplace over small institutions such as State National Bank of Big Spring.

If the plaintiffs are able to show that they have been harmed by the two new financial regulatory agencies, they would then need to show that the agencies violate the Constitution because the law does not place enough checks on their power.

The complaint makes numerous arguments as to why the authority granted to CFPB and FSOC is too broad.

For example, it alleges that the CFPB has power to regulate and enforce rules against unfair, deceptive and abusive lending practices, but without any clear definition of those terms. It also argues that Congress has no power over the CFPB's budget, and the judicial branch's ability to oversee the bureau's work is limited, among other arguments.

"Those features combine to create something that is both unprecedented and unconstitutional," said Adam White, a lawyer at the Washington law firm Boyden Gray & Associates, which is representing the plaintiffs. "At some point those add up to something that the Constitution just doesn't abide."

The issue of whether the authorities granted to the CFPB are unprecedented has been the subject of political debate ever since the agency was established.

Last July, the Senate Banking Committee held a hearing where the U.S. Chamber of Commerce argued: "The Bureau's current structure confers on its Director unprecedented unchecked power of extraordinary breadth, far beyond that wielded by any other federal regulator of individuals and businesses."

At the same hearing, Adam Levitin, a Georgetown University law professor, countered that the CFPB has numerous checks on its power, including three that no other financial regulator are subject to: a cap on its budget, the ability of a supermajority of the Financial Stability Oversight Council to veto its regulations, and an annual audit by the Government Accountability Office.

Levitin dismissed the lawsuit Friday as "right-wing claptrap."

"This is basically a rehash of after the-fact arguments that Republicans who are sore about having lost the financial regulatory reform debate are now trying to get a second bite at the apple," he said.

Even some who said the case should be taken seriously were skeptical of the claim that the CFPB has an unconstitutional delegation of authority. "If that's true, the Fed is unconstitutional," Ireland said.

White, the plaintiffs' lawyer, acknowledged that the Fed has considerable autonomy, but added: "All we're saying is that even the Federal Reserve isn't as reserved from checks and balances and oversight as the CFPB is." (White declined to say who was funding the lawsuit.)

He also noted that the Supreme Court has recently ruled that Congress can violate the Constitution by granting too much authority to an agency. In a 2010 decision, the Supreme Court found that members of the Public Company Accounting Oversight Board needed to be made subject to removal by the Securities and Exchange Commission.

But that court-ordered change was relatively minor in comparison to the changes that congressional Republicans have sought to the structure of the CFPB.

The complaint filed Thursday in the U.S. District Court for the District of Columbia does not seek any specific changes to the structure of the CFPB and FSOC. Instead, it asks the court to declare unconstitutional the portions of Dodd-Frank that create the two agencies, and to prevent the agencies from using any of the powers granted to them.

The courts could presumably rule in favor of the plaintiffs and still impose a less severe remedy, however.

Another question remains whether the bank has legal standing to challenge Cordray's recess appointment. Republicans argue the Senate was not technically in recess, thus preventing Obama from making a legal appointment.

Even if that's true, it's unclear whether the bank is affected by it. Most industry lawyers agree the CFPB had the power to oversee banks with or without a Senate-confirmed director. By contrast, however, the agency clearly lacked the authority to supervise nonbanks without a leader in place.

Although Cordray's appointment gives nonbanks a potential legal challenge, it's uncertain if banks can also claim the president's move affected them.

Still, several observers said that issue remains the strongest part of the overall lawsuit.

"They claim Cordray is an invalid recess appointment," Ireland said. "It looks to me like there's probably an issue there."

Rob Blackwell contributed to this article.