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NLRB Ruling Leaves a "Dark Cloud" Hanging Over CFPB
Posted to: MND NewsWire
Friday, February 08, 2013 9:49 AM

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Ballard Spahr, a national law firm conducted a web seminar this week to explain the possible ramifications of a recent Appeals Court ruling invalidating the appointments of three members to the National Labor Relations Board (NLRB.)  The decision potentially affects the Consumer Financial Protection Bureau (CFPB) and much of its work over the last year. 

The seminar was presented by Alan S. Kaplinsky, as moderator with panelists Richard J. Andreano, Jr.; Keith R. Fisher Denise M. Keyser Christopher J. Willis and Isaac Boltansky.  All of the participants are attorneys with the firm except Boltansky who is Senior Vice President and Policy Analyst at Compass Point Research and Trading.

Because of the length of the seminar and the amount of ground it covered, this summary will be divided into two parts.  This first part will discuss the background and legal issues surrounding the recent court opinion.  The second part will go into the potential and potentially serious ramifications should the NLRB decision be extended to CFPB.

On January 25, 2013 the three judges of the DC Circuit Court of Appeals ruled in Noel Canning v NLRB that three recess appointments made on January 4, 2012 were unconstitutional.  Since Richard Cordray had been appointed as director of the CFPB on the same day and in the same manner as the NLRB members, it was logical to assume that his appointment might also be invalid.

Kaplinsky said that while CFPB officials have indicated that they intend to conduct business as usual he is sure that Cordray and his staff are very worried about the implications of the court decision.  "There is a dark cloud hanging over the Bureau," he said, "which will disappear only if one of three things happens." 

First the Senate could confirm Cordray and he could then legally confirm all the actions he has taken since his appointment.  Second the government could petition for a rehearing in the same court or a hearing before the Supreme Court resulting in the validation of the appointments, or a compromise could be reached between the administration and the Senate.

Keyser reviewed the reasoning behind the Court's NLRB ruling. The appointments were made during pro-forma sessions in which the Senate, otherwise in recess, was gaveled to order a few times a week solely for the purpose of keeping the President from making recess appointments.  The President concluded that the Senate recess met the conditions for his making such appointments and did so to fill the four positions.

The prevailing clause in the Constitution reads, "The President shall have the Power to fill up all Vacancies that may happen during the Recess of the Senate by granting Commissions which shall expire at the End of the next session."  Originally recess appointments were made only during intersession recesses between Congresses but as intrasession recesses become longer and more common in the last century and appointments began to be made during these periods as well.  There have been at least 285 intrasession appointments made by 12 presidents and none have been challenged. 

Fisher said the Court held there were two constitutional infirmities in Obama's appointments:  "The Recess" applies only to intersession recesses, and the vacancy itself must happen during that recess.  Keyser points out that there is an additional argument not available to the NLRB case:  CFPB is a brand new agency so no "vacancy" could exist within the meaning of the Clause.

The first option available to the government - a petition for rehearing - would not have much likelihood of success as the decision was unanimous.  A petition for a rehearing En Banc, i.e. to all judges sitting in the circuit, would only involve a few more judges most of whom, like the three who handed down the decision, are Republican appointees, and unlikely to reverse. 

He said it is possible to see four votes to grant the Petition for Certiorari to the Supreme Court - the jurists could see the need to hear a case overturning Executive expectations dating back to FDR and involving the definition of key terms "Recess," "Happen," and "Vacancy" - but hard to find the fifth vote for reversal.

There are five other cases involving these appointments two of which involve Cordray.  In one of these his appointment appears about to be upheld. Of the other suits, one was dismissed and the remaining three are in process.   

Fisher said Dodd-Frank, in §1066 (a) talks about the operations of CFPB before a director is confirmed.  "The Secretary (i.e. Treasury) is authorized to perform the functions of the Bureau under this subtitle (i.e. Subtitle F of Title X) until the Director of the Bureau is confirmed by the Senate in accordance with section 1011."  The invalidation of Cordray's appointment would set the Bureau back to 2011 when it operated for six months without a director.  Its powers would be limited in two ways - they must be covered under this subtitle and must be performed by the Secretary of the Treasury. 

Most of the Bureau's powers are set forth in Title X outside of Subtitle F which only relates to those consumer protection powers transferred from the federal banking agencies as they existed on the day before the designated transfer date.  If OCC, the Fed, or other federal agencies did not have an authority prior to the CFPB, CFPB would not have that power without a director.  CFPB could continue to supervise large banks (over $10 billion in assets) through the Secretary of the Treasury but would lose non-bank supervision authority.  It could not supervise mortgage, student, or payday lending, "larger participants" such as credit reporting agencies, nor could it supervise service providers to large banks.

Enforcement powers would be similarly limited.  It inherited authority to issue orders which does extend to banks and in part to service providers but cannot engage in enforcement against non-banks without a director. 

All of the transferred functions can only be exercised by the Secretary.  They can be delegated but not to an unconfirmed director or anyone other than another Treasury official.

The practical implications of Noel Canning are unclear at the moment.  CFPB is continuing to operate as though nothing has happened and supervised entities will have to cooperate with examinations and enforcement unless they wish to litigate against the authority even before the courts extend Canning to the Cordray appointment and one non-bank in California has already done so.  If the recess appointment issue is resolved fairly quickly fighting over it now may not be worthwhile, but if it lingers non-banks are going to increasingly raise and litigate it. 




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