Potential Fallout of Cordray's CFPB Appointement being Invalidated

This is the second of two installments (part 1) summarizing a seminar given by Ballard Spahr, a national law firm, to explain the possible ramifications of a recent Appeals Court ruling invalidating three recess appointments to the National Labor Relations Board.  Noel Canning v NLRB has direct application to the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau which occurred at the same time as the NLRB appointments and under the same circumstances.   The first article addressed the appointments and the legal basis for the court rulings.  This second part deals with the fallout should Cordray's appointment ultimately be included in the decision.

Richard J. Andreano, Jr., Practice leader at Ballard Spahr said that prior to Dodd-Frank a number of enumerated consumer laws were spread among a number of agencies and were transferred to CFPB.  These include the following acts: Truth in Lending, Fair Debt Collection Practices, SAFE Mortgage Licensing, Section 626 of Omnibus Appropriations Act of 2009, Home Owners Protection, Real Estate Settlement Procedures, Fair Credit Reporting, and a number of others. 

In connection with these laws the Bureau adopted a number of Interim Rules most of which were published in December 2011 with request for comment. This was merely a housekeeping function, putting the existing regulations into the appropriate place in the Code of Federal Regulations, renumbering and clarifying some definitions. All rules were signed by an official of the Treasury, presumably under the powers of §1066(a).

The final mortgage rules adopted since November 2012 including the rulemaking on the TILA/RESPA disclosures, rules on Ability to Repay, Qualified Mortgages, Servicing Rules, Appraisals, Higher Risk Mortgages, Loan Originator Compensation and Qualifications were all adopted and signed by Cordray in his capacity as director and another rule on servicing transfers is expected.  Should his appointment be invalidated, Andreano said, it looks like these rules would be in a bit of trouble.  It appears Treasury would have authority to step and use its 1066 authority to validate the enumerated authority laws but not the rules signed off by Cordray.

Given that nearly all of that rule-making goes into effect in January 2014 and there is much work to be done, the general recommendation for businesses is to assume these rules will go into effect as scheduled.  Industry is looking at the situation but deciding they have no choice but to spend the billions of dollars needed to comply while moving ahead as though nothing has happened.

Keith R. Fisher, Of Counsel, said some people are hoping if the worst does happen that the De Facto Officer Doctrine could resurrect everything Cordray has done since he took office.  It confers validity upon acts performed by a person "acting under the color of official title" even if it is later discovered that the title was defective.  This doctrine is justified by the fear of the chaos that could ensue if around everything done by any official whose claim to office could be questioned.  It does not validate the appointment merely the acts performed under it.

The Supreme Court however has interpreted de facto very narrowly and has limited it to statutorily improper appointments.  In Ryder v US it specifically ruled it out in cases of constitutionally invalid appointments.

Issac Boltansky, Senior Vice President and Policy Analyst, Compass Point Research and Trading, said his mandate was to talk about the political considerations and what might happen going forward.  The Republicans have renewed their calls for structural changes to the CFPB and his discussions with Democrats on the Hill convince him that they have no intention of acceding to those changes.  Therefore the next move, he said, is probably left to the courts.

Both sides love the political elements of the fight.  Republicans are happy to focus on the fact that the President has been struck down in his attempt to circumvent the Senate's advice and consent powers.  Democrats feel they can highlight that the Republicans are standing in the way of attempts to advance consumer protection.  Both feel they can fight this out in the near term without any real repercussions.

In letters written to the President in May 2011 and again this month the House Republicans have stated their opposition to the appointment of any director until three key structural changes are made to the Bureau; the establishment of a bipartisan board of directors to supplant the single director; putting the Bureau under the Congressional appropriations process, and establishing a safety-and-soundness check for the prudential regulators.

In reality behind closed doors the opposition to CFPB has softened.  Senator Shelby (R-AL) is no longer head of the Senate Banking Committee and has been replaced by Senator Crapo (R-ID) who, Boltansky said, is a country mile away from Shelby in actual  governing; much more pragmatic, more of a deal maker, and a new face bringing new blood to the committee.  Second, CFPB rule-making has been well-received on Capitol Hill.  Expectations were such that, as long as the Bureau didn't go out and close down banks and arrest mortgage brokers it would be less burdensome than expected.  Third, elections do have consequences and many in the Senate feel it is time to move beyond the Dodd-Frank fights.

However, Boltansky said, there is still a lot of opposition.  Jeb Hensarling (R-TX) has taken up the cudgel in the House where he is Chair of Financial Services.  He has been opposed to the Bureau since Day One and the NRLB ruling has revived his opposition.  Bills are already emerging to curtail the Bureau.

The first bill, the Restoring the Constitutional Balance of Power Act is the one departure from previous efforts to change the structure of CFPB. It calls for stopping Federal Reserve money from funding any rule-making or any activities for which a CFPB Director is necessary.  This is the first time there has been a legislative attempt to cut off the source of funds to leverage structural change.

A second bill, The Responsible Consumer Financial Protection Regulation Act, puts into legislative language the three demands put forth in the letters to the President.  Hensarling plans on holding hearings on CFPB in the near future so the bills and the issues are going to come into focus after the State of the Union on Feb. 12

Boltansky said that Republicans may ultimately decide that changing CFPB's appropriations mechanism is a pipe dream and the safety and soundness issue difficult to obtain from a technical standpoint, but they feel that the commission structure is very do-able.  They harken back to the fact that Elizabeth Warren favored such a structure during the Dodd-Frank legislative process.

Boltansky concluded there are three points from a political and policy perspective.

• We have only seen repeat efforts to change the Bureau - the Republicans keep raising the same three issues they first put in the May 2012 letter.
• A court reversal of Cordray's appointment will mean a tectonic shift in the negotiations landscape. At minimum the Republicans will get a commission structure for the CFPB.
• It feels like there will ultimately be a political compromise but there is no immediate political catalyst; both sides feel there is a political plus to the fight.

Alan S. Kaplinsky, Practice Leader, questioned the status of CFPB employees.  A clause in Dodd-Frank, he said, seems to vest hiring in the director.   

Christopher J. Willis, a partner in the firm, said §1064 covers employees who transferred from other agencies.  It appears that Treasury can hire those people and put them on the CFPB payroll.  The power to hire new people is in Section §1013 and thus is vested in the director.  Most of the enforcement attorneys, examiners, and others who were hired under §1013 may not be valid employees.