Yesterday, the Consumer Financial Protection Bureau won its latest battle against accountability. Federal District Court Judge Ellen Huvelle dismissed a constitutional challenge brought by eleven states, a small bank, and two nonprofits against three of Dodd-Frank's sixteen titles, including the title that established the CFPB. The government defendants, which included the CFPB and Treasury, argued that the case should be dismissed for lack of standing and lack of ripeness. The court agreed that plaintiffs had not been injured and their claims were not ripe for review, but employed some strained reasoning to get there. A few of the court's puzzling assertions are described below.
Title I of Dodd-Frank, which authorizes the Financial Stability Oversight Council to designate certain firms as systemically important financial institutions, could give designated firms a funding advantage over their smaller rivals. The court reasoned that because some companies don't want to be designated, it is unlikely there is an advantage to being designated. Firms differ. An insurance company might reasonably conclude that being subject to bank-centric rules would outweigh any funding advantage that comes from being designated. For other firms -- the ones most likely to compete with the plaintiff bank for funding -- being designated might be worth the additional regulatory trouble.
Title II of Dodd-Frank, which creates an alternative to bankruptcy for large financial firms, creates harmful uncertainty for creditors of potential Orderly Liquidation Authority targets. The court reasoned that the plaintiff states, which are creditors in many of these institutions, were citing only speculative injuries because they do not know what the inaptly named orderly liquidation regime will look like in practice. That is precisely the point. The applicable legal regime for dividing up the leftovers if a company gets into trouble matters a lot to creditors. If that regime changes or appears to have changed, the value of the creditors' claims also changes.
Title X of Dodd-Frank, which creates the CFPB, changes the regulatory environment in which small banks operate. The court concluded that the small bank plaintiff had not been injured by that change. The court opined that the costs of monitoring a regulatory agency, like the CFPB, are not compliance costs at all, but rather "a self-inflicted injury." Most bank CEOs would probably be taken aback to learn that keeping abreast of what regulatory agencies are doing is not a compliance cost. Further, in the court's opinion, there's no need to hire outside help in understanding the CFPB, when its website is so "comprehensive and comprehensible." Website clarity is in the eye of the beholder.
The court also downplayed the importance of the CFPB's new authority to go after abusive practices. After all, "the Bank has been governed for decades by the Federal Trade Commission Act prohibition on 'unfair' and 'deceptive' practices. . . . It is therefore difficult to understand how the insertion of the word 'abusive' in defining the Bureau's regulatory authority could make any real difference in the types of business practices that will be scrutinized." Again, that is precisely the point. A new term must have some meaning, so clearly a practice that is neither unfair nor deceptive could be abusive under the statute. It would be nice for banks to understand in advance of an enforcement action what that new term means.
It is too bad that the CFPB and the rest of Dodd-Frank won't get their day in court before more damage is done.