Appeals Court revives Dodd-Frank court challenge

A Texas bank does have legal standing to argue that the Consumer Financial Protection Bureau (CFPB) is unconstitutional, the country’s second most powerful court ruled Friday.

The U.S. Court of Appeals for the D.C. Circuit overruled a previous ruling dismissing the legal challenge, and ordered the lower bank to rule on whether the CFPB’s existence violates the Constitution.

{mosads}The decision opens up a fresh legal battle for the Dodd-Frank Wall Street financial reform law, after it previously sputtered out in 2013.

The lawsuit was filed by State National Bank of Big Spring, Texas, which argued that it was being unconstitutionally harmed by the bureau and its work. Two conservative groups, the 60 Plus Association and the Competitive Enterprise Institute, also signed on to the case, as did 11 State attorneys general.

A judge originally dismissed the lawsuit in August 2013, saying the bank lacked standing and could not prove it had been harmed by the Dodd-Frank creations.

But the Court of Appeals determined that since the bank is regulated by the CFPB, it is not a “mere outsider” making a legal challenge, and laid out several of the regulatory steps the bureau has already taken in its four years of existence that could have impacted the bank. It also cited a previous Supreme Court ruling that found that regulated parties do not need to have violated the law to go to court, and can preemptively challenge regulations by legal means.

“It would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating agency,” the court ruled.

The Appeals Court also said the bank had standing to challenge the constitutionality of the recess appointment of CFPB Director Richard Cordray. President Obama recess appointed Cordray to the position in January 2012, along with three members of the National Labor Relations Board (NLRB). But Republicans cried foul, saying they had taken steps to specifically prevent a recess and block the nominations. The dispute went all the way to the Supreme Court, which ruled in June 2014 that the NLRB appointments were unconstitutional.

Cordray’s appointment was not at issue in that case, however. And furthermore, he was eventually formally confirmed by the Senate and ratified all the actions he took while operating under the recess appointment.

Friday’s ruling did not weigh in on the constitutionality of Cordray as director, but ordered the District Court to reconsider the matter.

A CFPB spokesperson said the agency is reviewing the ruling, parts of which went in the agency’s favor.

The Appeals Court, for instance, agreed with the lower court’s decision to throw out the bank’s legal challenge to the Financial Stability Oversight Council and regulators’ ability to step in and wind down ailing financial institutions. There, the Appeals Court concurred that the community bank did not have standing to challenge those parts of Dodd-Frank, which are aimed squarely at the nation’s largest financial institutions.