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Wrangled rule-makers

A Financial Stability Oversight Council meeting at the Treasury Department. (Alex Wong/Getty Images)

Alex Wong/Getty Images

Richard Cordray

Money

Wrangled rule-makers

Courts finally begin to rein in financial regulators

For the past six years, Washington bureaucrats have been rolling out tens of thousands of pages of new regulations implementing the 2010 financial reforms known as the Dodd-Frank Act. By one estimate, their handiwork had inflicted $24 billion in costs on American businesses as of last summer.

But the first hints are emerging that enough is finally enough. In recent weeks, several federal courts have chastised regulators for trying to grab even more power than the Dodd-Frank Act gave them.

In late March, a federal judge rebuked the Financial Stability Oversight Council (known as FSOC), one of the two new regulatory bodies created in 2010. Under Dodd-Frank, banks that have at least $50 billion in assets—as well as any other financial institution that FSOC decides is “systemically important” (that is, whose failure could harm the financial system)—are subject to a battery of additional regulatory requirements. After FSOC “designated” MetLife as systemically important, the big insurance company sued.

It turned out FSOC hadn’t even bothered to follow its own rules, which required it to consider whether there is a realistic chance a company will fail. FSOC also simply assumed that MetLife’s failure would threaten the nation’s financial stability, without explaining how or why. The judge rejected the designation, finding it “arbitrary and capricious.”

In April, another federal judge swatted down the other new regulator, the Consumer Financial Protection Bureau. Evidently concluding its existing powers are not broad enough, the consumer bureau had intervened in the college accreditation business, opening an investigation into a nonprofit organization that accredits many for-profit colleges and schools.

Asked what college accreditation has to do with consumer finance, the consumer bureau claimed it was probing to see if there is a connection between accreditation and student loans. The judge criticized that justification as “a bridge too far.”

Even bigger problems may loom for the consumer bureau, as suggested by yet another new case, in which a mortgage lender challenged bureau Director Richard Cordray’s unilateral decision to increase the fine assessed by an administrative law judge from $6 million to $109 million. During oral arguments in the case, a federal appellate judge called the director’s power to rewrite judicial rulings “very problematic,” hinting that the structure of the consumer bureau may be unconstitutional.

It’s too early to proclaim that regulatory sanity has returned. So far, the recent cases rein in only the worst examples of regulatory imperialism. Simply by being a little more careful next time, for instance, FSOC will still be able to subject nearly any financial institution it wishes to additional regulation.

Another problem: Over the past seven years, President Barack Obama has packed the federal appeals court in Washington, D.C., with left-leaning judges. Because most challenges to regulatory overreach are brought in Washington (including all three cases described here), regulators are much more likely to win on appeal than they were a few years ago.

Still, the wave of recent cases is a promising sign. For the first few years after the 2008 financial crisis, courts seemed unwilling to second-guess even the most egregious overreaching by regulators. The government got a pass for violating corporate and banking law with its financial institution bailouts and for flouting bankruptcy law when it bailed out carmaker Chrysler.

As the economy returns to something approaching normalcy, courts seem willing to take a closer look at what the regulators are up to. It would be even better if Congress rolled back the excesses of the Dodd-Frank Act. But if that isn’t a realistic possibility anytime soon, at least courts are finally setting some limits on the new regulatory imperialism.