LEGAL
The Consumer Finance Protection Bureau (CFPB) is very politically contentious and has been since its creation with the enactment of Dodd-Frank in July of 2010.
The agency's primary detractors are banks and other financial institutions along with congressional Republicans, who claim that the CFPB has too much authority. It's important to note, however, that no new regulatory powers were created specifically for the agency; instead, Dodd-Frank simply transferred existing regulatory authority from other federal agencies to the CFPB. For example, responsibility for the enforcement of both the Fair Debt Collection Practices Act and Fair Credit Reporting Act was transferred from the Federal Trade Commission (FTC) to the CFPB.
Nonetheless, as a federal agency, the Bureau has rulemaking authority, allowing it to promulgate any rule that it deems "necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof." The Bureau may, for example, prescribe rules "identifying as unlawful, unfair, deceptive, or abusive, acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service."
Given the wide discretion allowed in most agency rulemaking, the Bureau enjoys a significant amount of power in determining how these laws apply, and, more importantly, to whom. This enforcement discretion is one of the major points of contention for the agency's opponents, and this aspect is part of the broader criticism of the agency itself: its structure.
Specifically, rather than taking issue with any broad new regulatory powers of the CFPB, detractors claim that the actions of the CFPB are unfettered by a system of checks and balances since the agency operates with a central director rather than a committee. In addition, opponents argue that the agency's drawing its funds directly from the Treasury instead of through congressional appropriations makes it unaccountable to any other area of the federal government.
Hopefully, the irony is not lost on opponents of the CFPB who file suit asking a federal court to hold the agency accountable. The first such lawsuit, State Nat. Bank of Big Spring v. Lew, was filed in June of 2012 by a group of banks and other private entities (along with several states, whose causes of action I won't get into here).
The private entities argued that the Title X of Dodd-Frank, which created the CFPB, violates the separation of powers by "delegat[ing] effectively unbounded power to the CFPB, and coupl[ing] that power with provisions insulating the CFPB against meaningful checks by the Legislative, Executive, and Judicial Branches."
In addition, the private entities challenged the recess appointment of Richard Cordray as CFPB Director as unconstitutional. Opponents – especially congressional Republicans – have been fighting against the appointment of a CFPB director since, without a director, the agency is severely limited in its enforcement powers. However, the constitutionality of the president's recess appointments is actually a much larger issue that the Supreme Court will consider next term in NLRB v. Canning.
The D.C. District Court ended up ruling in State National Bank on August 1, 2013, but before that, on July 22, Nevada-based debt settlement company Morgan Drexen filed suit, claiming that the CFPB is unconstitutional for several reasons, including its broad discretionary enforcement powers.
Morgan Drexen also argues that the CFPB demands that Morgan Drexen produce documents that contain the personal financial information that belongs to clients of attorneys with whom the company works (thereby allegedly violating attorney-client privilege). This demand was part of an investigation by the CFPB into allegedly illegal practices by Morgan Drexen – an investigation that turned into a full-blown lawsuit at the end of August.
So how will this lawsuit turn out? And is the CFPB's structure constitutional?
Although we'll have to wait to find out the answer to both questions, we do have the State National Bank ruling to provide guidance on the former.
The court in State National Bank found that all of the challenging parties lacked standing to bring the lawsuit. In regards to the financial institutions' standing, the court found that they failed to properly allege an injury sufficient to confer Article III standing; according to the court, the alleged injuries of being subject to enforcement by the CFPB and any competitive disadvantage incurred because of agency actions were insufficient.
Morgan Drexen has made largely the same injury claims in its challenge, but there's one significant exception: it is facing an enforcement action, which was lacking in State National Bank and would have sufficed as an "injury" for standing purposes.
Even if Morgan Drexen's challenge survives a standing challenge, it shouldn't get its hopes up that it will be successful on the merits. After all, virtually all of its arguments for the unconstitutionality of the CFPB could be made against the agencies formerly responsible for the laws' respective enforcement (e.g., the FTC is not funded by congressional appropriations). The argument about the level of authority held by the CFPB director may be novel, but the complaint cites no legal authority as to why a director is unconstitutional where other forms of agency governance are allowable.
In all, the argument for the unconstitutionality of the CFPB seems a bit of an overreach, and any future targets of CFPB enforcement or rulemaking may likely have better luck challenging the agency's action under the Administrative Procedure Act.
Jeremy Byellin is a practicing attorney in the state of Minnesota and a writer for the Westlaw Insider blog. His articles for the blog cover a wide range of legal topics, with a specific focus on major legal developments and cyberlaw.
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