Filed Under:Your Practice, Regulatory

Lawsuit Challenges Constitutionality of FSOC

Photo credit: Salvatore Vuono
Photo credit: Salvatore Vuono

A small Texas bank and a conservative Washington think tank have joined to file a lawsuit challenging the constitutionality of the Financial Stability Oversight Council.

The lawsuit also challenges the constitutionality of the Consumer Financial Protection Bureau.

Insurers, however, are mostly exempt from oversight by the CFPB. Only such products as force-placed and debt protection insurance come under the bailiwick of the CFPB.

But Michael Nelson, chairman of international insurance-focused law firm Nelson Levine de Luca & Hamilton, based in New York, contends there are concerns by insurers about the potential impact of the CFPB on insurers. Nelson said the insurance industry fears the CFPB may attempt to regulate insurance products offered in conjunction with loans through its authority under the Truth in Lending Act.

“In comment letters submitted to the FIO, several trade associations requested that the regulatory actions of the CFPB be monitored to ensure that it does not attempt to directly or indirectly regulate insurance products,” Nelson said.

Both agencies operate under provisions of the 2010 Dodd-Frank financial services reform law. The suit, State National Bank of Big Spring, et al. v. Geithner, et al, D.D.C. No. 1:12cv1032, was filed June 21 in federal district court in Washington and assigned to Judge Ellen Huvelle.

Besides the Texas bank, the Competitive Enterprise Institute is among the plaintiffs. Another is the 60 Plus Association, Inc., based in northern Virginia.

Large insurance companies are deeply concerned about the impact of being designated as systemically significant and, therefore, subject to oversight by the FSOC as well as state regulators. Their concern is that federal oversight will subject them to expensive dual regulation. The lawsuit also contends that the cost of federal oversight is outweighed by its benefits.

The suit alleges that, “Companies that are designated nonbank financial SIFIs will allegedly be seen by the investing public as less risky and will purportedly be able to attract capital at an artificially low rate.”

The suit, “Plaintiff State National Bank of Big Spring, alleges that it is injured by FSOC's nonbank SIFI designations because it will be forced to compete with financial companies that are able to “attract scarce, fungible investment capital at artificially low costs.”

The suit also contends that Title I of the DFA, which created the FSOC, violates the Constitution's separation of powers clause because its "open-ended grant of power and discretion to the FSOC, combined with the elimination of the indispensable check of judicial review of the FSOC's judgments, and the inclusion of members who are neither appointed by the President nor confirmed by the Senate, gives the FSOC unfettered discretion in determining which nonbank financial companies will be designated ‘systemically important.’”

Nelson says that former Kentucky Insurance Commissioner, S. Roy Woodall, who was appointed by President Obama to serve as FSOC's voting member with insurance expertise, is also named as a defendant in the lawsuit.

He said the two non-voting FSOC members with insurance expertise, Federal Insurance Officer (FIO) Director Michael McRaith and John Huff, the Director of the Missouri Department of Insurance, were not named as defendants.

Among insurers, MetLife is in the process of selling its bank to GE Capital to avoid potential federal regulation as a bank holding company or as a systemically-significant financial institution (SIFI).

The Fed is delaying further scrutiny of MetLife until after it completes the sale of its bank to GE Capital, which must be approved by the Federal Deposit Insurance Corporation.

And, in a note released Tuesday, Sterne Agee cites as a potential negative for American International Group the fact that it might be designated a SIFI.

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