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
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
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
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
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