On November 6, 2015, State National Bank (SNB) filed a summary judgment motion in the United States District Court for the District of D.C., seeking a declaratory judgment holding that the CFPB is unconstitutional and invalidating the actions taken by Director Cordray during his 18-month recess appointment. See State National Bank of Big Spring, et al. v. CFPB, et al., Docket No. 1:12-cv-01032 (D.D.C. 2012). SNB completed summary judgment briefing on March 28, 2016, when it filed a reply in further support of summary judgment motion.
SNB argues that the CFPB violates separation of powers because neither the executive nor the legislative branch has oversight over the Bureau. SNB argues that the executive branch cannot exercise adequate oversight because, although it is a part of the executive branch, the CFPB operates entirely independently without seeking input from any executive branch official or obtain consent or approval before spending funds. SNB also claims that the the executive’s power is further constrained because the President can only remove the Director “for cause.” SNB argues that the Constitution requires that the President must be able to remove any executive official that acts as a Department head at will (i.e. not “for cause”), except in very narrow circumstances which the CPFB does not meet. Finally, SNB argues that there is inadequate legislative oversight over the CFPB because Congress cannot use its power of the purse to restrain the CFPB’s conduct. Because the CFPB receives its funding as part of the Federal Reserve’s budget—rather than directly from Congressional appropriations—Congress cannot specifically check the CFPB by withholding funds that have been specifically earmarked for the Bureau.
SNB also challenges Director Cordray’s recess appointment and the actions that he took during that time, despite the fact that Director Cordray was eventually confirmed and ratified all of the actions taken during his recess appointment. SNB likens Director Cordray’s recess appointment to the President’s appointment of three NLRB members, which were made on the same day as he appointed Director Cordray. The Supreme Court invalidated those NLRB recess appointments, finding that the Senate was not actually in recess at the time the President made them. SNB argues that Director Corday’s appointment should likewise be invalidated. Further, because Director Cordray’s recess appointment was invalid, SNB reasons that any actions that Director Cordray took during his recess appointment was null and void. SNB argues that Director Cordray could not later ratify those actions as a matter of law because he had no authority to act in the first place, and an action cannot be ratified if the person who took the action had no legal authority to do so in the first place.
The complaint—which was originally filed on June 21, 2012, and amended on September 20, 2012—also sought to challenge the Financial Stability Oversight Council and the power to liquidate financial institutions whose failure would pose a risk to the financial stability of the United States, which the Dodd Frank Act granted to the U.S. Treasury, the Federal Reserve, and the FDIC. The District of D.C. dismissed SNB’s complaint in its entirety on August 1, 2013, finding that SNB lacked standing to bring any of its claims. The D.C. Circuit reversed in part finding that SNB, as a regulated entity, had standing to challenge the CFPB’s constitutionality and Director Cordray’s recess appointment, but affirmed the remainder of the district court’s opinion. See State National Bank of Big Spring, et al. v. CFPB, et al., Appeal No. 13-5247 (D.C. Cir. 2013). SNB’s summary judgment motion resulted.
SNB’s constitutional challenge to the CFPB is not the first of its kind. On July 22, 2013, Morgan Drexen, Inc. filed a similar suit in the District of D.C. challenging the CFPB’s constitutionality, in response to the CFPB’s initiation of an enforcement action against it in another jurisdiction. See Morgan Drexen, Inc., et al. v. CFPB, Docket No. 1:13-cv-01112 (D.D.C. 2013). The District Court dismissed the case, but did not substantively address the constitutional question, holding that Morgan Drexen’s challenge was more appropriately addressed by the court in the jurisdiction where the enforcement action was pending. Morgan Drexen appealed, but the D.C. Circuit affirmed shortly thereafter. See Morgan Drexen, Inc., et al. v. CFPB, Appeal No. 13-5342 (D.C. Cir. 2013). Afterward, Morgan Drexen did not raise the theory in the enforcement action.
Now that SNB has cleared the constitutional standing hurdle, the stage is set for a court to substantively address the CFPB’s constitutionality for the first time. Lender LawWatch will continue to track this case, and will post an update as soon as the D.D.C. reaches its decision.
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