Dodd-Frank's Frankenstein Creeps Forward

This past week, a unanimous panel of the D.C. Circuit (Judges Kavanaugh, Pillard, and Rogers—Judge Kavanaugh writing) held that State National Bank of Big Spring, Texas (“SNB”) may proceed with its lawsuit challenging the federal Consumer Financial Protection Bureau’s authority on various constitutional grounds. The CFPB owes its existence and presumed authority to an excretion called the Dodd-Frank Act—which, by sheer fortuity, celebrated its fifth anniversary just this week. The Court also held that neither the bank nor various other plaintiffs (including several states) had “standing” to challenge other pieces of Dodd Frank (the Financial Stability Oversight Council and the Orderly Liquidation Authority. Don’t even ask.) The opinion is here. Disclosure, again: I serve on the Board of the Competitive Enterprise Institute (CEI), which is a co-plaintiff in this case and, moreover, played a lead role in engineering it.

The Court’s dismissal of the government’s objections to its jurisdiction takes all of three pages. “The Supreme Court,” Judge Kavanaugh writes, “has stated that ‘there is ordinarily little question’ that a regulated individual or entity [such as SNB] has standing to challenge an allegedly illegal statute or rule under which it is regulated. [Rote cite to Lujan v. Defenders of Wildlife.] So it is in this case.” There remains the argument that the suit isn’t “ripe” because it is a pre-enforcement challenge (as opposed to a defense against a pending prosecution). Blah: “[I]t would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating agency.” Basic Ex Parte Young stuff. The usual AdLaw cites, dutifully proffered by Judge Kavanaugh, are Abbott Labs and Free Enterprise Fund v. PCAOB (another CEI case, as it happens). Some cases really are that easy.

So why did the CFPB and its co-defendant try this stuff? One, government agencies can produce jurisdictional defenses at zero marginal cost. They just dump the contents of the appropriate file drawer on the plaintiffs—who then have to pay their lawyers to respond. Two, litigating the jurisdictional jazz takes time—in this case, over three years. In the interim the regulatory regime becomes entrenched; regulated industries of needs accommodate themselves; and the agency has clear sailing.

That dynamic is particularly acute here. The Circuit’s order is a remand to the District Court, which will now entertain the merits arguments on its own good time. There’ll be another appeal to the D.C. Circuit. And the separation-of-powers issues are sufficiently intricate and novel to require the Supreme Court’s intervention at some point. We’re talking years.

The CFPB exercises breathtaking authority over a vast range of financial industries. It decides—by regulation or prosecution, as it sees fit—what constitutes an “abusive” financial practice. Unlike other “independent” agencies, the CFPB is headed by a single Director—currently, Richard Cordray, whose term expires in 2018. Come 2016, a new President may have different ideas about financial regulation. However, he cannot remove the Director except for cause—meaning not at all, unless he steals the table silver. Nor can the President or even the Congress control the CFPB’s budget: the agency is funded through a mandated transfer of funds from the Federal Reserve. So far as the financial sector is concerned, then, it’s President Cordray. And, oh: Mr. Cordray will remain in office unless and until Congress confirms a successor. Over Senator Elizabeth Warren’s dead body.

All this is by design. In Dodd Frank, a temporary Democratic majority in Congress managed to institutionalize Senator Warren’s desired reign of regulatory harassment and to protect it against political vicissitudes—a change in the presidency, and a change in any future Congress. The question is whether that makes any sense, and whether it’s constitutional. Pending a definitive judicial disposition, maybe President Trump can solve the Cordray conundrum in his customary fashion: “You‘re fired.”