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Consumer bureau faces court challenge

Appointment of Richard Cordray at CFPB draws legal fire

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Three big credit card companies agreed to refund about $435 million to their customers in 2012 under agreements with the federal Consumer Financial Protection Bureau -- but now the bureau's actions are being called into question.

Richard Cordray, director of the CFPB, was appointed to a temporary term without Senate approval last year in a procedural move. The president renominated him for the job in January, but it looks like Senate confirmation is still going to be an uphill battle. Tuesday, the Senate Banking Committee approved his nomination -- but Republicans on the committee were unanimously opposed, a signal of trouble ahead in the full Senate. If Republicans again filibuster his nomination, it would take 60 votes to override the move, and Democrats plus independents have only 55.

Appointment of Cordray at CFPB under fire

Just how shaky is the ground under Cordray, his agency and its actions? Here in question-and-answer format is a look at the controversy and how it could affect the CFPB's consumer protection moves, according to policy analysts and legal experts.

Q: A federal court has tossed out a different recess appointment -- does that mean Cordray's appointment in 2012 wasn't kosher?
In January, the U.S. Court of Appeals for the District of Columbia Circuit ruled that recess appointments President Barack Obama made to another agency -- on the same day that he appointed Cordray -- are unconstitutional. Legal scholars say that the case, Noel Canning v. the National Labor Relations Board, does not have a direct impact on the CFPB. However, it can be used in court to challenge the consumer agency's actions under Cordray. Victor Williams, a professor at Catholic University's Columbus School of Law, called the appeals court decision "a sword hanging over the CFPB."

The Supreme Court is expected to review the appellate court's ruling in the NLRB case. If the top court gives the ruling a thumbs-up, opponents of the CFPB will have a strong argument that Cordray's appointment was unconstitutional. There is a case against the CFPB now in the United States District Court for the District of Columbia brought by State National Bank of Big Spring (Texas) that challenges Cordray's appointment and other aspects of the bureau. That particular case is seen as weak because of problems with Big Spring's legal standing to sue, but other opponents could make a stronger case.

Q: Three credit card companies agreed to refund about $435 million to their customers in 2012 under agreements with the consumer bureau. Will those agreements be nullified if Cordray's appointment is tossed out?
Not likely. Opponents of the bureau say all its actions are under a cloud, but legal experts don't expect its banking actions to be rolled back, even if courts nullify Cordray's appointment. The bureau's banking powers are derived from existing authority at other federal regulators. Also, the settlements with American Express, Capital One and Discover were performed jointly with other bank regulators, whose powers are not in question. Although the settlements are open to challenge, experts say that it is unlikely to happen, for business reasons as well as legal ones.

Richard Cordray was named CFPB director in a recess appointment by President Barak Obama in January 2012.

In response to questions, Capital One and American Express said they do not plan to challenge the agreements, while Discover wouldn't comment.

Q: What impact does the uncertainty around the bureau have on its other initiatives, such as supervising debt collectors?
The part of the bureau's authority involving nonbanks, such as debt collectors and credit bureaus, could be rolled back. Also, its power to find financial products deceptive would be undercut. Currently, the bureau's biggest nonbank effort is seen as its supervision of large debt collection companies, which began this year. The bureau continues to announce non-banking regulatory initiatives; however, its ability to bring about negotiated orders, such as last year's agreements with card issuers, is probably weakened.

There is some precedent for upholding the actions of a federal banking agency director even if his appointment is nullified. That's what happened after the appointment of the Office of Thrift Supervision Director M. Danny Wall was ruled unconstitutional in 1990. The actions taken by the agency during his term were allowed to stand. But the circumstances back then were different from Cordray's situation, making the precedent wobbly.

Q: What will happen to the bureau and its programs?
The agency was created by the Dodd-Frank Act within the Federal  Reserve. Republicans have used the Senate's confirmation power over its director as a lever to push for changes in the structure of the bureau. Instead of a single director, they are seeking a bipartisan board to head the bureau. They also want the agency's budget to be subject to the annual appropriations process in Congress, instead of being funded through the Federal Reserve as it is now.

Policy analysts expect that the final word will come from the political realm, not the courts. If the Supreme Court backs up the appeals court's ruling, that would prompt the Obama administration to enter a compromise.

The timing of court action is likely to take until later this year or into 2014, and the administration would not feel pushed to compromise until there's an unfavorable court ruling. If that happens, according to experts outside of the political fray, the likely upshot is a restructuring of the CFPB with a five-person board, no more than three of whom would be from the same political party. This follows the model of other regulatory agencies such as the FCC. It is also likely Cordray would depart -- either to appease agency foes or to pursue statewide office in his home state of Ohio.

Whether the compromise would include putting the consumer protection bureau's budget under the control of Congress is another question. Consumer advocates are vehemently opposed to this, saying it would render the agency toothless, and the administration might dig in its heels on this point.

Sources for this analysis, in addition to Victor Williams who is quoted above, are Jaret Seiberg, financial service policy analyst at Guggenheim Partners; Alan Kaplinsky, head of the consumer financial services group at law firm Ballard Spahr, Tuan Samahon, professor at Villanova University School of Law,  and a paper,  "Implications for the CFPB After the D.C. Circuit's Recess Appointments Decision," by the law firm Davis Polk.

See related: Consumer watchdog begins supervising 'nonbank' companies, Consumer Financial Protection Bureau watchdog turns 1

Published: March 20, 2013


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