Last week, the D.C. Circuit Court of Appeals reversed a D.C. District Court decision dismissing a bank’s complaint challenging the constitutionality of the CFPB based on lack of standing. The district court had concluded that compliance costs were not an actual injury and, as a result, found that the bank lacked standing and that the claims were not ripe. On appeal, the D.C. Circuit found that the bank had standing to challenge the constitutionality of its own regulator and allowed the case to go forward.

In 2012, State National Bank of Big Spring (“State National”) a small Texas bank, joined by the Competitive Enterprise Institute and a non-profit senior advocacy group, filed suit in the D.C. District Court challenging the constitutionality of the creation of the Consumer Financial Protection Bureau (CFPB), the appointment of CFPB Director Richard Cordray, and the operation and creation of the Financial Stability Oversight Council (FSOC). Later, the states of Michigan, Oklahoma, South Carolina Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, Texas, and West Virginia joined the suit as plaintiffs to challenge Dodd-Frank’s grant of orderly liquidation authority to the Treasury, the Federal Reserve, and the FDIC.

State National, a small regional bank with three locations in Texas, is a federally chartered community bank with less than $275 million in deposits. It offers checking accounts, savings accounts, certificates of deposits, and individual retirement accounts—consumer financial products subject to CFPB regulation. In its district court complaint challenging the agency’s constitutionality, the bank argued that creation of the CFPB violated separation of powers principles because Congress “delegated effectively unbounded power to the CFPB, and coupled that power with provisions insulating the CFPB against meaningful checks by the Legislative, Executive, and Judicial Branches.” The bank also alleged that the CFPB, as an independent agency, needs to be headed by multiple members, not a single person, to be constitutional. State National also claimed that CFPB Director Cordray’s appointment was unconstitutional because it was made without the Senate’s advice and consent in alleged violation of the Appointments Clause.

State National alleged injuries caused by the formation and operation of the CFPB, which consisted of compliance costs, loss of profitability in remittance transfers, loss of revenue in mortgage lending, and a discontinuation of mortgage lending due to loss of revenue. The district court found these alleged injuries insufficient to establish standing to challenge the constitutionality of the CFPB and that it was not enough to simply say that State National was “directly subject to the authority of the agency.” The court also found that the claims were not ripe because the specific rules challenged were not applicable to the bank.

In the D.C. Circuit opinion, the court found that all that the Bank was required to show was that it was regulated by the CFPB in order to have standing to challenge its constitutionality—which it found that the Bank had established below. The court also noted that State National did not challenge the regulations of the CFPB, but rather regulation by the CFPB, so as to have demonstrated ripeness. It applied this same rationale to find standing to challenge the constitutionality of Cordray’s appointment to head the agency. However, the court also opined that State National did not have standing to challenge the FSOC, because State National was a small bank, not subject FSOC regulations as a “too big to fail entity.” The court did not accept the bank’s “competitor standing” theory, i.e. the bank’s argument that it had standing because it competed with entities subject to FSOC regulation.

Finally, the court found that the states lacked standing to challenge the constitutionality of the orderly liquidation authority and that such a claim was not ripe, as the states could identify no specific action under the orderly liquidation authority as an injury. In a footnote, the Court noted that, if action is taken under which a state could show such an injury, the states could raise their constitutionality arguments at that time.

The case was remanded to permit State National to advance its challenge to the constitutionality of the CFPB and the appointment of Director Cordray on the merits in the district court. Thus, State National still faces the legal burdens inherent in challenging the constitutionality of any agency. Nevertheless, the decision provides precedent for covered entities to establish standing to challenge CFPB authority as a result of being subject to its regulations.

Read the full opinion »