The Consumer Financial Protection Bureau 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 bureau 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 the regulatory bar assumes that it too will fail to survive judicial review.
For companies subject to the bureau's 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 bureau 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—supervising large banks and enforcing 18 pre-existing consumer laws like the Real Estate Settlement Procedures Act, for example. But it would lack authority to supervise non-banks including pay-day lenders, debt collectors and credit bureaus, or 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 the bureau's 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."
Ballard Spahr partner Alan Kaplinsky, who heads the firm's consumer financial services group, warned 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."
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