Bench Memos

Stacking the Deck for Dodd-Frank

I’ve previously written about the constitutional challenge to Dodd-Frank brought by several states along with private plaintiffs, including State National Bank of Big Spring Texas and the Competitive Enterprise Institute. The government filed its motion to dismiss last week, asserting basically that the law has not injured the plaintiffs. Ironically, in doing so the government relies upon the very structural deficiencies in the Consumer Financial Protection Bureau (CFPB) and the Orderly Liquidation Authority (OLA) that are challenged as unconstitutional. It’s as if a poker player stacked the deck, and then cited his winnings to prove that he did not cheat. Let me explain.

The CFPB has a subjective ability to regulate “abusive practices,” which the agency’s head Richard Cordray will define on a case-by-case basis, under a sort of “know it when you see it” theory of regulation. This makes it impossible to predict what will fall under “abusive” liability. Rather than face this uncertain regulatory future, plaintiff Big Spring National Bank of Texas made the sensible decision to file this lawsuit and exit the mortgage industry altogether.

Ironically, the government argues that Big Spring’s exit from the mortgage industry was not an injury . . . by pointing to the injury itself: uncertainty over “abusive practices” liability. The government seems to think that because Big Spring cannot know yet if the CFPB would prohibit their type of mortgages, they can get off the hook. Apparently, banks should just trust the consumer-finance czar to accept their mortgages, and not plan for the possibility that the czar decides otherwise.

The government response to OLA complaint is similarly misguided. There, the states challenge the government’s expansive ability to nullify their pensions’investment in supposedly “failing”financial institutions.

Plaintiffs’amended complaint explains:

Title II exposes the State Plaintiffs to a present and ongoing substantial risk of direct economic harm, in the event of the Treasury Secretary’s and FDIC’s liquidation of a financial company for which a State Plaintiff is a creditor. Such a liquidation can happen at any time, and would happen without advance warning; indeed, the State Plaintiffs would be barred, as a matter of law, from being told of the liquidation until after the Treasury Secretary’s liquidation order goes into effect. (emphasis mine).

In other words, states are worried that they will not know until too late how the OLA will affect their pensions’ investments. But here again, the government argues this cannot be an injury, because the states cannot know if the OLA will affect their pension funds. Once again, the government appears to assume that the proper response to government intrusion is to trust an unaccountable agency, and fail to plan for the possibility that things go awry.

Dodd-Frank’s proponents in 2010 supported a massive and unaccountable bureaucratic structure, ignoring how destructive the law would be for economic growth. Now, the Obama administration is defending its unchecked power. However, I remain hopeful that the court will see through these smokescreens and proceed to evaluate the constitutional challenge to Dodd-Frank on its merits.

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