Suit against U.S. Consumer Financial Protection Bureau could force it to define limits to its authority, says banking industry lawyer

June 29, 2012

By Emmanuel Olaoye

NEW YORK, June 29 (Thomson Reuters Accelus) – Even if a small bank’s lawsuit challenging the authority and leadership of U.S. Consumer Financial Protection Bureau fails in court, it could force the bureau to publicly define its limits, a top banking industry lawyer said.

Joseph Barloon, a partner at Skadden Arps in Washington, said the bureau could be forced to say what it can and cannot do, and provide the banking industry some guidance on the agency’s positions on issues such as mortgage lending.“By being put in a position where it has to defend a claim that it has too much authority, it might need to make statements about its own limits on its authority,” Barloon told Thomson Reuters.

“There is a lot of uncertainty today with respect the CFPB can do and how it would do it, ” he said. “This lawsuit, even if not successful, may help clarify some of those issues.”

The comments come a week after a small community bank in Texas launched the first lawsuit against the CFPB over the recess appointment of its director and its structure.

The State National Bank of Big Spring, Texas, and two conservative groups sued the CFPB last week over the recess appointment of Consumer Financial Protection Bureau director Richard Cordray and the structure of the agency.

The $275 million asset community bank claimed the recess appointment of Cordray was unconstitutional and said the existing structure of the agency left it without checks and balances on its authority. The bank said the bureau’s wide authority over mortgage lending created uncertainty.

The lawsuit also targets the Financial Stability Oversight Council, a coalition of existing regulators that is tasked by Dodd-Frank to study risk in the financial system. It argues that the FSOC’s classification of some banks as “systemically important” would raise funding costs for smaller banks because the market would believe that systemically important banks have an implicit government backing.

Cornelius Hurley, a former Federal Reserve lawyer and professor of banking law at Boston University, said the delay over Elizabeth Warren’s nomination as the agency’s director may have hampered negotiations with the CFPB’s opponents about its structure.

“The irony is this was her baby but she is possibly as responsible as anyone for the predicament that it is now in,” Hurley said. “Warren staying out of the limelight for so long prevented Obama from appointing Richard Cordray sooner and perhaps he would have been confirmed without any challenges from the Republicans.”

Hurley said the plaintiff’s argument about the funding advantage of systemically important banks was a fair one. He said the outcome of the case could ultimately depend on whether the plaintiffs get a friendly judge.

“What we’re finding is that the courts are now as politicized as Congress is,” he said.

Jeff Sigmund, senior director of public relations for the American Bankers Association, said the ABA “had long supported a board or commission to address the Bureau director’s unchecked authority.”

“We strongly believe a commission structure would broaden the perspective on any rule-making 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,” he said.

Aleis Stokes, spokesman for the Independent Community Bankers of America, declined to state the ICBA’s position on the lawsuit.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=” ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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