Potential Fallout of Cordray's CFPB Appointement being Invalidated

This is the second of two installments (part 1)rnsummarizing a seminar given by Ballard Spahr, a national law firm, to explainrnthe possible ramifications of a recent Appeals Court ruling invalidating three recessrnappointments to the National Labor Relations Board.  NoelrnCanning v NLRB has direct application to the appointment of Richard Cordrayrnas director of the Consumer Financial Protection Bureau which occurred at thernsame time as the NLRB appointments and under the same circumstances.   The first article addressed the appointmentsrnand the legal basis for the court rulings. rnThis second part deals with the fallout should Cordray’s appointment ultimatelyrnbe included in the decision.</p

Richard J. Andreano, Jr., Practicernleader at Ballard Spahr said that prior to Dodd-Frank a number of enumeratedrnconsumer laws were spread among a number of agencies and were transferred tornCFPB.  These include the following acts:rnTruth in Lending, Fair Debt Collection Practices, SAFE Mortgage Licensing, Sectionrn626 of Omnibus Appropriations Act of 2009, Home Owners Protection, Real EstaternSettlement Procedures, Fair Credit Reporting, and a number of others.  </p

In connection with these laws the Bureaurnadopted a number of Interim Rules most of which were published in December 2011rnwith request for comment. This was merely a housekeeping function, putting thernexisting regulations into the appropriate place in the Code of Federal Regulations,rnrenumbering and clarifying some definitions. All rules were signed by anrnofficial of the Treasury, presumably under the powers of §1066(a).</p

The final mortgage rules adopted sincernNovember 2012 including the rulemaking on the TILA/RESPA disclosures, rules onrnAbility to Repay, Qualified Mortgages, Servicing Rules, Appraisals, Higher RiskrnMortgages, Loan Originator Compensation and Qualifications were all adopted andrnsigned by Cordray in his capacity as director and another rule on servicingrntransfers is expected.  Should hisrnappointment be invalidated, Andreano said, it looks like these rules would bernin a bit of trouble.  It appears Treasuryrnwould have authority to step and use its 1066 authority to validate thernenumerated authority laws but not the rules signed off by Cordray.</p

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

Keith R. Fisher, Of Counsel, said some peoplernare hoping if the worst does happen that the De Facto Officer Doctrine could resurrect everything Cordray hasrndone since he took office.  It confersrnvalidity upon acts performed by a person “acting under the color of officialrntitle” even if it is later discovered that the title was defective.  This doctrine is justified by the fear of the chaosrnthat could ensue if around everything done by any official whose claim tornoffice could be questioned.  It does notrnvalidate the appointment merely the acts performed under it.</p

The Supreme Court however hasrninterpreted de facto very narrowlyrnand has limited it to statutorily improper appointments.  In Ryderrnv US it specifically ruled it out in cases of constitutionally invalidrnappointments.</p

Issac Boltansky, Senior Vice Presidentrnand Policy Analyst, Compass Point Research and Trading, said his mandate was torntalk about the political considerations and what might happen goingrnforward.  The Republicans have renewedrntheir calls for structural changes to the CFPB and his discussions withrnDemocrats on the Hill convince him that they have no intention of acceding tornthose changes.  Therefore the next move,rnhe said, is probably left to the courts.</p

Both sides love the political elementsrnof the fight.  Republicans are happy to focusrnon the fact that the President has been struck down in his attempt torncircumvent the Senate’s advice and consent powers.  Democrats feel they can highlight that thernRepublicans are standing in the way of attempts to advance consumer protection.  Both feel they can fight this out in the nearrnterm without any real repercussions.</p

In letters written to the President inrnMay 2011 and again this month the House Republicans have stated theirrnopposition to the appointment of any director until three key structuralrnchanges are made to the Bureau; the establishment of a bipartisan board ofrndirectors to supplant the single director; putting the Bureau under the Congressionalrnappropriations process, and establishing a safety-and-soundness check for thernprudential regulators.</p

In reality behind closed doors thernopposition to CFPB has softened.  SenatorrnShelby (R-AL) is no longer head of the Senate Banking Committee and has beenrnreplaced by Senator Crapo (R-ID) who, Boltansky said, is a country mile awayrnfrom Shelby in actual  governing; muchrnmore pragmatic, more of a deal maker, and a new face bringing new blood to therncommittee.  Second, CFPB rule-making hasrnbeen well-received on Capitol Hill.  Expectationsrnwere such that, as long as the Bureau didn’t go out and close down banks andrnarrest mortgage brokers it would be less burdensome than expected.  Third, elections do have consequences andrnmany in the Senate feel it is time to move beyond the Dodd-Frank fights. </p

However, Boltansky said, there is stillrna lot of opposition.  Jeb Hensarlingrn(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 DayrnOne and the NRLB ruling has revived his opposition.  Bills are already emerging to curtail thernBureau.</p

The first bill, the Restoring the Constitutional Balance of Power Act is the onerndeparture from previous efforts to change the structure of CFPB. It calls forrnstopping Federal Reserve money from funding any rule-making or any activitiesrnfor which a CFPB Director is necessary. rnThis is the first time there has been a legislative attempt to cut offrnthe source of funds to leverage structural change.</p

A second bill, The Responsible Consumer FinancialrnProtection Regulation Act, puts into legislative language the three demandsrnput forth in the letters to the President. rnHensarling plans on holding hearings on CFPB in the near future so thernbills and the issues are going to come into focus after the State of the Union onrnFeb. 12</p

Boltansky said that Republicans mayrnultimately decide that changing CFPB’s appropriations mechanism is a pipe dreamrnand the safety and soundness issue difficult to obtain from a technicalrnstandpoint, but they feel that the commission structure is very do-able.  They harken back to the fact that ElizabethrnWarren favored such a structure during the Dodd-Frank legislative process. </p

Boltansky concluded there are threernpoints from a political and policy perspective.</p<ul class="unIndentedList"