DC Circuit Court Hears Arguments in Cases Challenging CFPB Authority

The U.S. Court of Appeals for the D.C. Circuit heard oral arguments in two cases Wednesday that challenge the CFPB’s authority to regulate financial services firms due to its one Director leadership structure. The specific arguments concerned standing to bring such suits, with the merits of the challenges pending.

In Morgan Drexen v. CFPB, a California-based legal services and debt relief firm filed suit against the CFPB in DC courts in July 2013 claiming that during the course of the Bureau’s investigation of the firm, its civil investigative demands for documents and communications exceeded the CFPB’s regulatory authority. Shortly after, the CFPB filed its own suit against Morgan Drexen in California, an enforcement action, which it says was the result of its investigation.

Drexen’s case against the CFPB was dismissed in October 2013 by a District judge in DC. (The CFPB’s enforcement case against Drexen, however, is still proceeding after surviving a motion to dismiss in January of this year.)

Wednesday’s oral arguments in DC Circuit Court were the result of Drexen’s appeal of the October 2013 ruling.

A three-judge panel heard from both sides why they feel Morgan Drexen has standing to bring the case. Although the merits of the challenge were not on the table, one of the judges offered an opening when he asked if he could get a “peek” at the merits. The attorney for Drexen quickly rattled through the familiar arguments of a one-director leadership structure for a powerful federal regulator which stands in contrast to other agencies like the FTC and SEC.

The main argument on standing was whether Morgan Drexen, and co-plaintiff Kimberly Pisinski – a solo attorney in Connecticut – were actually harmed by the CFPB’s investigative demands. The plaintiffs insist that surrendering sensitive and privileged documents, the type the CFPB requested, would cause damage to their business.

The main focus of the initial ruling against Morgan Drexen in DC court was the reluctance of the judge to take up the case due to the CFPB’s pending suit in California. The judge insisted that Morgan Drexen could raise Constitutionality questions in that suit.

In appealing the ruling in the CFPB’s enforcement action, Morgan Drexen recently filed a response to the CFPB’s motion for summary judgment in the case that lays out its complete argument.

Morgan Drexen has not been shy about its allegation against the CFPB, going so far as to launch a web site dedicated to its lawsuit against the Bureau. It claims, primarily, that the CFPB’s request for information violates consumers’ privacy.

The other case heard Wednesday, State National Bank of Big Spring, et al. v. Jacob Lew, et al., involves private plaintiffs and state attorneys general banding together in a direct challenge to the CFPB’s very existence. Jacob “Jack” Lew is the current Treasury Secretary, the cabinet that houses the CFPB.

That case argues that the bank in question, as well as two DC non-profits, are harmed by the CFPB because they incur costs as a direct result of new regulation from the CFPB. Eleven state attorneys general, all Republicans, joined the case arguing that states are subject to CFPB regulation because of their duties as receivers for failed financial institutions in liquidation.

In August 2013, a DC district court tossed the case at the CFPB’s request on standing.