Constitutional challenges to the CFPB’s authority have not ended with Director Cordray’s confirmation last week as CFPB Director. Yesterday, a lawsuit was filed against the CFPB in federal district court in Washington, D.C. by two targets of the CFPB’s crackdown on the debt relief industry which claims that the agency’s structure violates the Constitution because it “insulates [the CFPB] from political accountability and internal checks and balances.”
The plaintiffs in the lawsuit are a Connecticut bankruptcy attorney and a company whose personnel served as paralegals and other support staff for the attorney. The complaint alleges that, ancillary to and as part of her bankruptcy services, the attorney assisted clients in resolving their debts. According to the complaint, in March 2012, the CFPB issued a Civil Investigative Demand to the company seeking information that is relevant to the company’s “relationship with attorneys that provide debt settlement services that are ancillary to their legal representation.” The complaint states that the CFPB has indicated that it is considering enforcement action against the company. It also states that the CFPB has taken the position that attorneys who use the company’s personnel are in violation of the Telemarketing Sales Rule (TSR) because the CFPB considers the hourly rates charged by the attorneys for bankruptcy services to be unlawful “upfront fees.”
The complaint alleges that the CFPB’s structure violates the Constitution’s separation of powers because of the absence of meaningful limits in the Dodd-Frank Act on the types of conduct the CFPB can deem “unfair, deceptive or abusive,” the CFPB Director’s unilateral right to request funding from the Fed, and the limits on Presidential and judicial oversight of the CFPB Director and the agency. The complaint also alleges that because the CFPB is seeking to regulate the practice of law, its actions represent a usurpation of state authority. The remedies sought by the complaint include preliminary and permanent injunctive relief.
In the complaint, the plaintiffs expressly reserve various rights if the CFPB is found to be constitutional. They reserve the right to claim that the CFPB’s attempt to apply the TSR to attorneys engaged in the practice of law violates the Tenth Amendment and the Dodd-Frank provision that excludes the practice of law from the CFPB’s supervisory and enforcement authority. They also reserve the right to claim that, under the Administrative Procedure Act, such attempt falls outside the CFPB’s jurisdiction or authority and is “arbitrary, capricious and contrary to law.”