The Obama Administration has been defined by two sweeping pieces of legislation. One, the Affordable Care Act, looked potentially doomed up until Thursday's pundit-defying split decision by the Supreme Court that upheld its constitutionality.
Now that other piece of signature legislation, the Dodd-Frank Act, is facing a similar constitutional challenge that threatens, however remotely, to dismantle it.
To be sure, the challenge to Dodd-Frank's constitutionality is in the earliest stages, and it currently doesn't have the backing of any entity nearly as significant as the state attorneys general offices that contested the healthcare law. But as the recent Supreme Court decision indicates, anything can happen in the court of law.
On June 21, The State National Bank of Big Spring, Texas; the Competitive Enterprise Institute (CEI); and the 60 Plus Association filed a lawsuit in U.S. District Court for the District of Columbia challenging the constitutionality of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It asks that the court invalidate the law because of the “unprecedented, unchecked power it gives the government.”
Rather than pick its fight in the broad scope of the legislation, the suit focuses on the creation of the Consumer Financial Protection Bureau. According to the lawsuit's complaint against the CFPB, there are no effective checks and balances to assure the public of accountability. Congress exercises no “power of the purse” over the CFPB and even the President cannot remove its director, except under limited circumstances. Judicial review of the bureau's actions is limited, because Dodd-Frank “requires the courts to give extra deference to the CFPB's legal interpretations,” the plaintiffs claim.
A challenge to the constitutionality of the Public Company Accounting Oversight Board, a provision of the Sarbanes-Oxley Act, was launched in 2006 on similar grounds. That case, Free Enterprise Fund v. Public Company Accounting Oversight Board (drafted with the assistance of CEI), went all the way to the Supreme Court, which ruled in 2010 that while the way the board's members were appointed did violate the constitution and would have to be changed, the board itself could remain.
“As a whole, Dodd-Frank aggregates the power of all three branches of government in one unelected, unsupervised, and unaccountable bureaucrat,” Former White House Counsel C. Boyden Gray, attorney for the plaintiffs, said in a statement.
What about the Financial Stability Oversight Council, a Dodd-Frank-created body intended to have CFPB oversight? The plaintiffs take issue with its powers as well, and argue that it can only overturn a CFPB regulation under limited circumstances, and then only if 7 of the 10 FSOC members, including the CFPB director himself, vote to do so. The suit by the Competitive Enterprise Institute and others also challenges the constitutionality of the FSOC.
The CFPB's “lack of checks and balances violate the Constitution's separation of powers,” says Hans Bader, CEI attorney. “Its director is like a czar,” he says. “He is not accountable to anyone and can't be fired even if voters elect a president with different ideas about how to protect consumers.”
Constitutionally, the president has the authority to fire department heads at will, a power defined by the Supreme Court in the Myers v. U.S. decision of 1926, according to Bader.
“The CFPB's director is as different from traditional independent agencies as a dictator is from a legislature,” he adds. “Unlike the chairman of an independent agency like the SEC, who can be outvoted by fellow commissioners if he oversteps his authority, the CFPB's director is accountable to no one.”
“There is no question the CFPB—by the design of Dodd-Frank Act supporters—lacks accountability and transparency. As it is currently structured, the CFPB is one of the most powerful and least accountable agencies in all of Washington.”
—Spencer Bachus,
Chairman,
Financial Services Committee
Dodd-Frank established the CFPB as an independent bureau within the Federal Reserve. From its origins, Republican lawmakers have battled against it, leading President Obama to place Richard Cordray as head of the CFPB via a “recess appointment,” the validity of which has been protested by opponents who claim that, technically, Congress wasn't adjourned at the time.
The group of legal challengers isn't the only one to find the CFPB's authority objectionable. Financial Services Committee Chairman Spencer Bachus has introduced legislation to place the CFPB under the leadership of a five-member, bipartisan commission.
On the day the lawsuit was filed, he weighed in with words of support. “There is no question the CFPB—by the design of Dodd-Frank Act supporters— lacks accountability and transparency,” he said. “As it is currently structured, the CFPB is one of the most powerful and least accountable agencies in all of Washington.”
Bachus said his legislation, H.R. 1315, approved by the house in July 2011 by a vote of 241-173, “also promotes continuity in rulemaking by preventing a new director from unilaterally reversing the decisions made by a previous director.”
Though he has yet to issue an official statement, one of Dodd-Frank's namesakes, Congressman Barney Frank (D-Mass.), told The Hill newspaper that the CFPB legal challenge is “one of the worst irresponsible lawsuits I've ever seen.” He dismissed oversight complaints by pointing out that the bureau operates in a similar manner as the Office of the Comptroller of the Currency.
Not a Frivolous Suit
CHALLENGING DODD-FRANK
Below is an excerpt from the Competitive Enterprise Institute's Website regarding the State National Bank of Big Spring's lawsuit against the Dodd-Frank Act:
The State National Bank of Big Spring, Texas, today filed a lawsuit asking the U.S. District Court for the District of Columbia to hear its case challenging the constitutionality of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Competitive Enterprise Institute and the 60 Plus Association are also joining this community bank as plaintiffs in the same action, requesting the Court to invalidate the law because of the unprecedented, unchecked power it gives the government.
“No other federal agency or commission operates in such a way that one person can essentially determine who gets a home loan, who can get a credit card and who can get a loan for college,” said Jim Purcell, CEO of State National Bank. “Dodd-Frank effectively gives unlimited regulatory power to this so-called Consumer Financial Protection Board, also known as CFPB, with a director who is not accountable to Congress, the President or the Courts. That is simply unconstitutional.”
No Checks and Balances
According to the complaint, there are no effective checks and balances to assure the public of accountability. Most importantly:
Congress exercises no “power of the purse” over the CFPB, because the agency's budget – administered essentially by one person—comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
The President cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the President cannot remove the CFPB Director except under limited circumstances.
Judicial review of the CFPB's actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB's legal interpretations.
The plaintiffs claim in their suit that Dodd-Frank gives an agency of unelected government bureaucrats unrestrained power. They argue this unaccountable power over the daily lives of the American people results in a lack of public accountability, creating a power grab over every U.S. citizen.
Source: Competitive Enterprise institute.
Still, there are some that say the suit has its merits. “The more credible aspects of this relate to separation of powers and checks and balances,” says Stephen Quinlivan, an attorney at Leonard, Street, and Deinard. “Certainly, on the whole, it is not frivolous. Is this going to be the only lawsuit of its type? I would predict not. The CFPB has not yet flexed its muscles. A lot of people think that once it makes its move and files some sort of ugly litigation against someone these issues will surface in that litigation as well, and perhaps have more legs. There will be more believable allegations, at least in terms of something that needs to be decided quickly. A lot of what's in the CEI lawsuit just seems pretty hypothetical. If there were more tangible harm being applied to somebody, I think there would be a better case.”
Since its passage, Dodd-Frank has been a magnet for lawsuits. Among the notable cases:
A federal appeals court decision last July struck down an SEC proxy access rule.
In April, the Investment Company Institute and the U.S. Chamber of Commerce challenged Commodity Futures Trading Commission regulations requiring certain mutual funds and exchange-traded funds already regulated by the SEC to also be regulated by the CFTC as “commodity pool operators.” The crux of the complaint is that the CFTC failed to conduct an adequate cost-benefit analysis.
In December, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association sued over a CFTC rule limiting speculation on commodities.
No matter the outcome of the latest legal challenge, it is unlikely that efforts to reshape the CFPB will stop anytime soon.
“While the court will decide the merits of the suit, ABA has long supported instituting a board or commission to address the bureau director's unchecked authority,” says Jeff Sigmund, spokesman for the American Bankers Association. “We strongly believe a commission structure would broaden the perspective on any rulemaking and enforcement activity, providing needed balance and ensuring consumer access to choice and competition in the marketplace. The FDIC, SEC, FTC, Federal Reserve, and the Consumer Product Safety Commission all have boards to provide thoughtful, balanced governance.”
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