Handicapping the CFPB in 2013

2013 began with a bang for the Consumer Financial Protection Bureau. In January, the Bureau released several mortgage-related final rules as mandated by the Dodd-Frank Act. The mortgage industry has been in a mad rush to put together webinars to detail ability-to-repay, appraisal reform and high-cost mortgage requirements. It is not an exaggeration to note these mortgage rules consumed much of the Bureau’s bandwidth in its brief existence.

So, just as the Bureau comes up for air, it gets rocked by an somewhat related court case concerning another federal agency, the National Labor Relations Board. How are the two agencies connected by this court case? Let’s hit the rewind button.

It’s no deep Washington secret that current presidents are having a more difficult time getting various federal nominees through the US Senate. It’s also no secret that modern presidents have utilized “recess” appointments more and more (as permitted by the U.S. Constitution). Enter the controversial CFPB and the quest to have the Senate confirm a Director as required by Dodd-Frank. The Bureau existed for almost 18 months without a confirmed Director. Elizabeth Warren ran the CFPB during its incubation period as a special advisor to the President. Having a director in place was important to the Bureau because it would assume certain authority (such as the authority to supervise non-bank entities like debt collectors and credit bureaus) only with a confirmed Director.

It became very apparent to President Obama and others the Senate would not have 60 votes necessary to bring the nomination of Elizabeth Warren to the Floor for a vote. In 2011, President Obama nominated former Ohio Attorney General Rich Cordray to be the CFPB Director. The Senate Banking Committee approved Cordray’s nomination out of committee, but many Republican senators wanted to consider structural changes to the CFPB before moving on Cordray’s nomination. For example, altering the Bureau from control by a single Director to a five-member commission. And making the Bureau subject to annual Congressional appropriations versus receiving its funding from the Federal Reserve. Senate Democrats believe the Bureau is just fine as Dodd-Frank created it, so Cordray’s nomination was at a stalemate in the late stages of 2011.

On January 4, 2012, President Obama rolled the dice. Believing the Senate was in “recess,” the President appointed Cordray as the director of the CFPB. At the same time he made recess appointments of three nominees to the NLRB. The legal community hit an uproar shortly thereafter on both sides of the issue. In April 2012, a Washington state-based company, Noel Canning, was the lead plaintiff in the case against the Administration’s NLRB recess appointments. In January of this year the U.S. Circuit Court of Appeals (DC) unanimously ruled against President’s Obama recess appointments to the NLRB.

The three-judge panel declared the Senate remained in “pro forma” sessions when the appointments occurred and was not technically in recess. The Obama Administration announced its intention to appeal the ruling to the U.S. Supreme Court. The NLRB decision called into question the validity of Richard Cordray’s recess appointment to be the CFPB Director. The Cordray question is being addressed in a separate lawsuit still pending before another court. On January 24, 2013, President Obama announced his decision to re-nominate Cordray as CFPB Director subject to Senate confirmation. Congress will consider legislation again in 2013 to alter the Bureau’s structure (five-member commission as opposed to a single director) and subject the Bureau to annual Congressional appropriations.

So, where does this leave the CFPB in 2013? I doubt the Bureau will be affected much at all in the short term. It will continue on with its examination of banks and non-banks. It will take some high-profile enforcement actions. It will put forth some challenging proposed rules on overdraft protection and general purpose prepaid cards. Even if the district court decides Cordray’s appointment was unconstitutional sometime in 2013, the appeals process could take years. Will the court strike down all the Bureau actions and rules taken while Cordray served as Director? And, what of the fate of Cordray? This is the biggest unknown. Will the Senate confirm him without any changes to the Bureau itself? Does he leave at the end of 2013 as his recess appointment expires and Obama puts forth another nominee?

If you have answers to these questions, go buy a lottery ticket quickly.