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Federal judge dismisses states' challenge to Dodd-Frank law

By Casey Sullivan

(Reuters) - A federal judge on Thursday dismissed a lawsuit challenging the constitutionality of several sections of the Dodd-Frank financial reform act, which had been brought by a group that included a small bank and 11 state attorneys general.

Judge Ellen Huvelle of the U.S. District Court for the District of Columbia dismissed the lawsuit brought last year by State National Bank of Big Springs, Texas, the Competitive Enterprise Institute, the 60 Plus Association and 11 state attorneys general.

The plaintiffs challenged Titles I, II and X of Dodd-Frank, which established financial oversight units, such as the Financial Stability Oversight Council, the Orderly Liquidation Authority and the Consumer Financial Protection Bureau.

The plaintiffs argued that the State National Bank, with less than $300 million in assets, would suffer because of rules the CFPB writes to police mortgages and other consumer products the bank offers.

The bank also targeted the FSOC, a coalition of regulators called for in Dodd-Frank to study risk in the financial system. The lawsuit argued that the FSOC's designation of certain banks as "systematically important" to the banking system would raise borrowing costs for smaller banks.

In another allegation, the bank said that the increased regulatory scrutiny prompted it to spend more than $230,000 in compliance costs in 2012, including classes on CFPB regulations and a subscription to a service called "Compliance Alliance" created by Texas Bankers Association in response to the passage of Dodd-Frank.

But Judge Huvelle said: "The Bank's assertion that it was forced to expend these costs rings hollow since it is not clear that (compliance venders) provide needed information about Bureau regulations that is not readily accessible from the Bureau's ... website."

The state plaintiffs, which included Michigan, South Carolina and Nebraska, challenged the portion of the Dodd-Frank law that empowered the Treasury secretary to order a liquidation of a financial company whose collapse may threaten the stability of the banking system.

The states had claimed that because their pension funds were creditors of financial institutions, and if those institutions were liquidated on orders by the FSOC rather than through bankruptcy, then they could be treated unfairly.

Huvelle dismissed the entire case on the grounds that the plaintiffs lacked standing and did not show that they had been injured as a result of Dodd-Frank.

Huvelle called the case "unusual" because the plaintiffs had not faced "any adverse rulings nor has agency action been directed at them."

"Most significantly, no enforcement action - 'the paradigm of direct governmental authority' - has been taken against plaintiffs.'

Plaintiffs and government lawyers did not immediately respond to requests for comment.

The case is: State National Bank of Big Spring et al., v. Jacob J. Lew et al., Case No. 12-1032 (ESH), United States District Court for the District of Columbia (Reporting by Casey Sullivan; editing by Jackie Frank)

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