A recent Federal appellate decision poses potentially far-reaching consequences for financial services regulation in the U.S., with the efficacy of the Federal government's top consumer finance authority hanging in the balance.
On Friday, January 25, the D.C. Circuit Court of Appeals (Noel Canning v. NLRB, case no. 12-1115) invalidated President Obama's January 2012 appointments of three National Labor Relations Board members. Finding the President's use of the Constitution's "recess appointments" clause defective, the court essentially voided ab initio the three members' service on the NLRB, with the result that the NLRB had no quorum during most of 2012. Thus the D.C. Circuit implicitly invalidated a year's worth of actions by that body.
As has been widely reported, the Noel Canning decision further clouds the President's recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau. Such appointment was announced at about same time as the NLRB designees and is similarly being challenged on Constitutional grounds. (See State National Bank of Big Spring, Texas, et al. v. Geithner, et al., D.C. Dist. Court, No. 1:12-cv-01032-esh). If the Cordray appointment meets the same fate as that of the NLRB members, what would this mean for the CFPB?
One critical difference between the two cases is that the position of Director is a newly created one, and, under the CFPB's enabling statute (The Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203), the Secretary of the Treasury has some authority over the CFPB's affairs even in the absence of an initial Director. However, such authority is not identical to that which a Director would have. In light of the CFPB's prolific activity under Director Cordray's tenure to date, it is worth considering the possible impact that an invalidation of his appointment would have on financial regulation.
Section 1066(a) of Dodd-Frank provides for the Secretary's interim authority pending the installation of a Director. "The Secretary is authorized to perform the functions of the [CFPB] under [subtitle F, "Enforcement"] until the Director. . . is confirmed by the Senate. . ." In the event that Director Cordray's appointment is invalidated pursuant to the holding in Noel Canning, with the result that all of the CFPB's actions taken under his direction are void, it could be argued that at least some of such actions could have been performed by the Treasury Secretary. It remains to be seen whether any such act can be summarily "ratified" or otherwise cured by the Secretary if the Director is found to lack capacity, or alternatively if there is some de novo effort required to validate the acts which the Secretary must perform or oversee. Similarly, it is not certain what the retroactive effect would be of any such invalidation and reinstatement/ratification if challenged.
2011 letter to Congress from the inspectors general of the Treasury Department and the Federal Reserve Board of Governors (the "FRB")1outlined the Secretary's authority to manage the CFPB in the absence of a Director. Until a Director is confirmed, the Secretary may, according to the inspectors general, exercise the following powers of the Director:
- to prescribe rules, issue orders and produce guidance related to the Federal consumer financial laws that were, prior to July 21, 2011, within the authority of the FRB, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and certain other Federal regulatory bodies,
- to conduct examinations (for Federal consumer financial law purposes) of banks, savings associations and credit unions with total assets in excess of $10 billion and any affiliates thereof,
- to prescribe rules, issue guidelines and conduct a study or issue a report (with certain limitations) under the enumerated consumer laws that were previously within the authority of the Federal Trade Commission prior to July 21, 2011,
- to conduct all consumer protection functions relating to the Real Estate Settlement Procedures Act of 1974 and certain other Federal laws concerning residential lending,
- to enforce all orders issued by an agency whose duties were transferred to the CFPB by Dodd-Frank, with respect to a bank, savings association or credit union with total assets in excess of $10 billion and any affiliates thereof, and
- to replace any such agency (whose subject matter has been transferred to the CFPB) in any lawsuit or proceeding commenced prior to July 21, 2011.
By contrast, the letter specifically states that "if there is no Senate-confirmed Director by [July 21, 2011], in general, the Secretary is not permitted to exercise" (emphasis added) the CFPB's authority to
- prohibit unfair, deceptive or abusive acts or practices in connection with consumer financial products and services,
- prescribe rules and require model disclosure forms,
- prescribe rules relating to determinations by the CFPB as to whether a nondepository institution should be supervised by it, or
- supervise nondepository institutions.