Too Big to Succeed

Major constitutional lawsuit filed against Dodd-Frank is critical of bill’s scope

June 21, 2012

A small community bank in Texas is challenging the constitutionality of the Dodd-Frank financial reform.

The State National Bank of Big Spring, Texas, filed a lawsuit in D.C. Circuit Court challenging the ability of regulators to designate banks as systemically important. It also criticized the newly created Consumer Financial Protection Bureau’s lack of institutional oversight.

"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," State National Bank CEO Jim Purcell said Thursday in a release. "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."

C. Boyden Gray, former White House counsel to George H.W. Bush, will lead the legal battle. He said that the law, which was intended to combat too-big-to-fail banks by establishing enhanced regulations for "systemically important financial institutions" (SIFI), has actually helped to bolster large banks and made it harder for community banks to attract investors.

"This bank has been harmed by Title 1 … a SIFI designation tends to reduce capital costs [for large banks]," Gray said. "By designating banks as SIFI, it puts small financial companies at a consistent disadvantage in raising capital."

State National Bank has about $275 million in assets. The five largest American banks held $8.5 trillion in 2011, according to Bloomberg. Dodd-Frank has done little to stem the flow of money into the largest banks; in 2011, 56 percent of the total U.S. economy rested in the five largest banks, up from 43 percent in 2006.

The lack of regulatory oversight has hurt transparency and could lead to abuse since the law concentrates rulemaking efforts with federal regulators rather than Congress,Gray said.

The Economist likened the broad authority given to regulators by Dodd-Frank to the Hydra of Greek mythology, which "can grow new heads as needed."

"Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies," Yale Law Prof. Jonathan Macey told the British magazine.

The suit will focus on two major provisions in the bill—Titles 1 and 10—and would not overturn the entire law, according to Gray.

"We are asking the court to have Congress correct these issues, and it wouldn’t be very hard to fix," Gray said. "The courts would give a roadmap to Congress to fix it."

The consumer board has attracted its share of controversy since the Dodd-Frank Act established it. Republicans blocked Barack Obama’s top choice to head the bureau, Richard Cordray, forcing the president to recess appoint him.

The lawsuit was filed on Thursday afternoon and could reach the courts by the end of the year. The attorneys expect a lengthy legal battle.

"If the district court and the court of appeals were to accept the theory of the complaint, you can be assured this will end up … at the Supreme Court," Gray said.