Richard Cordray
To comply or not to comply? That's the question now facing companies involved in proceedings before the Consumer Financial Protection Bureau.
The much-feared new regulator was dealt a devastating—if indirect—blow last week, when the U.S. Court of Appeals for the D.C. Circuit ruled that three recess appointments to the National Labor Relations Board were invalid. Although CFPB Director Richard Cordray was not named in the suit, his recess appointment was made on the same day and under the same assertion of executive power, and lawyers assume that it too cannot survive judicial review.
For companies subject to CFPB oversight, it's a potential game-changer.
"The CFPB is on notice that director Cordray is in jeopardy," said Hunton & Williams partner Ronald Rubin, who was one of the first enforcement lawyers hired by the agency. "This will be part of the discussion for almost everything that the CFPB does."
By statute, the CFPB can't exercise its full powers without a confirmed director.
The Dodd-Frank Act of 2010 that created the CFPB specifies that the agency without a director may use the powers it inherited from seven other agencies, such as supervising large banks and enforcing 18 pre-existing consumer laws like the Real Estate Settlement Procedures Act. But in such a situation, it lacks authority to supervise non-banks including pay-day lenders, debt collectors and credit bureaus, and to write regulations identifying unfair, deceptive or abusive acts or practices in consumer financial products or services.
Given the apparent invalidity of Cordray's appointment, companies now facing CFPB compliance demands may simply decide to balk, said George Mason University School of Law Professor Todd Zywicki, speaking on a conference call organized by the Federalist Society.
"They could take the position, for instance, that 'We don't have to comply with the qualified mortgages rule because it's not a valid law,'" he said. "Then the CFPB would have to initiate an action to enforce it against the private person, and that is obviously a pretty dicey proposition, with a clear [D.C. Circuit] ruling staring them in the face."
But Ballard Spahr partner Alan Kaplinsky, who heads the firm's consumer financial services group, warns that such a stance could be unwise in the long-term.
"The logic of the opinion applies directly to Cordray's appointment, but no court has yet held that it is invalid," he said. "Unless or until that happens, I think anyone thumbing their nose at the bureau is doing so at great peril. Things will get sorted out. It's not like the bureau is going away anytime soon."
Kaplinsky said one client facing a supervisory visit from the CFPB called him wondering if they should turn the inspectors away at the door. Kaplinsky's advice: absolutely not. "When they arrive, give them coffee," he said. "Don't treat them any differently. It won't help you."
Troutman Sanders partner John Lynch, who leads the firm's financial services litigation group, agreed that "most companies are under the assumption that they still have to follow the rules."
Still, the D.C. Circuit decision and looming uncertainly over Cordray's appointment could make a difference in the short-term for companies facing agency subpoenas known as civil investigative demands as well as other enforcement actions.
"If you have a [civil investigative demand] against you right now, you probably have more negotiating leverage," Lynch said. "There is some uncertainty, but the question is, what is the value of that uncertainty at the negotiating table?"
Cordray's recess appointment is being challenged in a case currently pending U.S. District Court for the District of Columbia brought by a Texas community bank, the Competitive Enterprise Institute and others. The government argues that the parties lack standing because they have not suffered any actual injury from CFPB actions.
Even if that case is dismissed on procedural grounds, Rubin of Hunton & Williams predicted "it's only a matter of time before another company brings its own constitutional challenge."
But ultimately, the solution may need to come from Congress, not the courts.
On January 24, the day before the D.C. Circuit issued its decision, President Obama renominated Cordray to head the CFPB. Last year, Republicans in the U.S. Senate refused to consider his nomination unless the CFPB was first restructured as a five-member commission and made subject to the congressional appropriations process.
The recess appointment was a way to side-step those demands, but the president will not have that luxury this time around.
Venable partner Jonathan Pompan said the court decision "gives substantial leverage to Senate Republicans who are looking for any opportunity to push Democrats and the president" to restructure the agency.
One key difference between the Senate last summer and today is the presence of Elizabeth Warren. The newly elected Democrat from Massachusetts was the moving force behind the CFPB's creation. Whether she will support CFPB restructuring is unclear, but her influence is potentially enormous.
"The big wild card that could break the political stalemate is Elizabeth Warren," Rubin said. "Now that she's a senator on the banking committee, her support for some or all of the CFPB structural changes the Republicans want could convince other Democrats, and possibly the president, to compromise."
This article originally appeared in The National Law Journal.
See also: "After D.C. Circuit Ruling, What Happens to NLRB Decisions and its GC?", CorpCounsel, January 2013.
