EXCLUSIVE-California judge rejects challenge to U.S. consumer watchdog

NEW YORK Mon Jan 13, 2014 11:30pm GMT

NEW YORK Jan 13 (Reuters) - A California federal judge has spurned a constitutional challenge to the U.S. Consumer Financial Protection Bureau, saying the new agency set up to aid financial consumers does not interfere with the president's executive power as alleged.

In a ruling on Friday, U.S. District Judge Josephine Staton said Congress did not restrict the president's executive power by providing that the CFPB's director could only be removed for good cause.

The decision is believed to be the first time a federal court has ruled on the merits of a constitutional challenge to the CFPB, created by the 2010 Dodd-Frank financial reform act after the financial crisis of 2007-2009.

The bureau has been under scrutiny since its creation, with banks complaining about its sweeping enforcement powers, while congressional Republicans have criticized it and tried to block the appointment of its first director, Richard Cordray.

The challenge rejected by Staton was brought in a Santa Ana district court by California-based Morgan Drexen, a legal support services firm. The company was sued by the CFPB in August for allegedly charging improper fees and deceiving consumers about its services.

Morgan Drexen had asked Staton to dismiss the enforcement action against it and declare the CFPB unconstitutional, saying it was too insulated from the customary government checks and oversight that apply to other regulators.

The firm singled out what it called the unprecedented power of the CFPB's director, who can only be removed for good cause and does not share power with a multi-member board.

A spokesman for the CFPB could not immediately be reached for comment.

An earlier challenge, brought by State National Bank of Big Spring, Texas and 11 state attorneys general, was dismissed in August when the judge ruled plaintiffs lacked standing to sue.

APPEAL PLANNED

Randall Miller, a lawyer for Morgan Drexen at Venable, said he plans to appeal. "We asked the district court to hold that the agency is unconstitutional and district courts usually don't feel comfortable doing that," he said. "This is an issue that is going to have to be appealed."

In its challenge, Morgan Drexen said the CFPB was not responsive to the electorate because it was insulated from the president's removal power and Congress's power of appropriations.

Staton disagreed, saying the president "retains ample authority to assure the director is competently leading the CFPB" because he can be removed for inefficiency, neglect of duty or malfeasance.

She also disagreed that Dodd-Frank impermissibly exempts CFPB from congressional appropriations power. While no money may be paid out of the U.S. Treasury without being appropriated by Congress, the CFPB's funds come from earnings of the Federal Reserve System, not the Treasury, Staton said.

She also rejected Morgan Drexen's argument that a commission, instead of a single director, would be a better structure to lead the CFPB.

"Absent some constitutional basis, this court simply does not have the authority to second guess Congress' policy determination" to put a single director in charge, Staton wrote.

In a court filing in November, lawyers for the CFPB said Morgan Drexen was trying to evade responsibility through a meritless attack on the bureau's constitutionality.

The company failed to show that the bureau's structure "violates the basic separation of powers principle that one branch of government may not intrude on the prerogatives of another," the lawyers said.

The case is Consumer Financial Protection Bureau v Morgan Drexen Inc et al, U.S. District Court, Central District of California, No 13-cv-1267. (Editing by Kevin Drawbaugh and Eric Walsh)

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