Texas Bank Challenges Constitutionality of Dodd-Frank Act

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Two Conservative Groups – The Competitive Enterprise Institute and the 60 Plus Association- joined State National Bank of Big Spring, Texas on Thursday in a lawsuit challenging the constitutionality of two provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The lawsuit argues that the Consumer Financial Protection Bureau (CFPB), which regulates consumer financial products and services, and the  Financial Stability Oversight Council (FSOC), which was established up to address systemic risks posed by large banks, are both unconstitutional.

The lawsuit also challenges the constitutionality of President Obama's recess appointment of Ohio Attorney General Richard Cordray to the head of the Bureau of Consumer Financial Protection. Senate Republicans had voted down Cordray's nomination after vowing publicly to hamstring the agency by derailing any nominee. Then, they held brief “pro forma” sessions of Congress to prevent recess appointments. President Obama eventually bypassed the Senate and installed Cordray anyway, arguing that because the short sessions do not constitute substantial work, they could be ignored for appointment purposes.

The CFPB aims to ensure American consumers get clear, accurate information as they shop for mortgages, credit cards, and other financial services so that they can avoid hidden fees and abusive and deceptive lending practices. The FSOC, which was created in response to the global financial crisis in 2008, is a collection of the nation's most influential regulators. The Council collects and analyzes information from financial institutions and other interconnected entities to identify systemic risks to U.S. financial stability. The lawsuit alleges that the CFPB and FSOC “comprise unprecedented violations” of the separation of powers and checks and balances contemplated in the Constitution.

From the filing:

“First, the CFPB's formation and operation violates the Constitution's separation of powers. Title X of the Dodd-Frank Act delegates effectively unbounded power to the CFPB, and couples that power with provisions insulating CFPB against meaningful checks by the Legislative, Executive, and Judicial Branches… below. Taken together, these provisions remove all effective limits on the CFPB Director's discretion, a violation of the separation of powers.

FSOC's formation and operation violates the Constitution's separation of Powers. FSOC has sweeping and unprecedented discretion to choose which nonbank financial companies are “systemically important” (or, “too big to fail”). That designation signals that the selected companies have the implicit backing of the federal government-and, accordingly, an unfair advantage over competitors in attracting scarce, fungible investment capital.”

It seems to me that claiming the CFPB and the FSOC violate separation of powers and checks and balances ignores the fact that the agency was created by, and can be changed by, Congress. And the FSOC makes it tough for banks to get “too big to fail” in the first place by imposing rules for capital, leverage, and liquidity. It also has the authority to break up large companies by requiring them to divest holdings as a last resort. So, the notion that the FSOC will create a two-tiered financial system seems to ignore that the FSOC's main goal is to create a level playing field for all banks. Its overarching goal is to prevent the need for taxpayer-funded bailouts of big banks in the first place.

A CFPB Spokessman was dismissive of the suit:

“The lawsuit appears to dredge up old arguments that have already been discredited,” said bureau spokesman Jennifer Howard. We're going to keep our focus on the important work Congress created us to do – making markets work for consumers and responsible providers.”

I think the CFPB and the FSOC are probably both safe in the face of this lawsuit, which seems like an election-year stunt designed to gin up the birthers and Tea Party base of the modern Republican party. They seem to revel in banal blather about the evils of government doing anything to protect people cloaked in Constitutional jargon.

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