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Invalidation of Recess Appointments Impacts Cordray Appointment

Appeals court issues ruling

Jan. 25, 2013 (revised Jan. 26, 2013)

By Mortgage Daily staff


Update Jan. 26
Mortgage Daily originally reported that a "federal appeals court has ruled that President Barack Obama's appointment of the director of the Consumer Financial Protection Bureau was unconstitutional." Mortgage Daily should have instead reported that the ruling means that the CFPB appointment was unconstitutional.

This important ruling is being researched this weekend by Ballard Spahr LLP, and an alert on the ruling is expected Monday from the Washington, D.C.-based firm. The alert is expected to focus on "the validity of the mortgage regs and the remittances regulation," according to Alan Kaplinsky, a Ballard Spahr partner who was interviewed for the Mortgage Daily story.

A CFPB statement provided to Mortgage Daily after the publication of the story said, "The bureau is not a party in the case decided today, and the court's ruling has no direct effect on the bureau. Going forward, we will continue our essential work to protect American consumers."

A newsletter Friday from Wilmer Cutler Pickering Hale and Dorr LLP said that although CFPB Director Richard Cordray's "recess appointment was not directly challenged in this case, the DC circuit's reasoning would appear to apply equally to his appointment." The law firm, which operates dual headquarters in Boston and Washington, D.C., noted that Cordray's appointment is already being challenged in U.S. District Court for the District of Columbia, and the "decision thus has significant ramifications for the legality of the actions of Mr. Cordray and the bureau."


A federal appeals court ruling means that President Barack Obama's appointment of the director of the Consumer Financial Protection Bureau was unconstitutional -- potentially throwing some of the recently issued mortgage regulations into jeopardy and giving non-bank lenders a reprieve from enforcement actions. The decision gives Republicans extreme leverage in how the regulator is run.

Richard Cordray, Ohio's former attorney general, was appointed CFPB director by Obama a year ago while the Senate was in recess. Cordray had been tough on lenders while acting as the Buckeye State's top lawyer.

The move enabled the president to bypass Congress for what would have been a difficult confirmation.

At the time, bankers blasted the appointment.

"The controversial nature of today's recess appointment reinforces the banking industry's concerns about the bureau's structure and lack of accountability," American Bankers Association President and Chief Executive Officer Frank Keating said in a statement. "It puts the bureau's future actions in constitutional jeopardy, threatening its work, complicating compliance efforts of banks and further undermining the entity's authority and credibility."

On Friday, the U.S. Court of Appeals for the District of Columbia ruled in a collective bargaining lawsuit filed against soda bottler and distributor Noel Canning that the recess appointments were not constitutional.

sketch of Richard Cordray by Stephen McConnell
sketch of Richard Cordray by Stephen McConnell

Alan S. Kaplinsky, a partner at Ballard Spahr LLP who specializes in consumer financial services, said in a telephone interview that the government's oral arguments in the case last month went very poorly.

The decision means that the CFPB cannot supervise non-bank lenders and banks with less than $10 billion in assets, according to Kaplinsky. It rolls back the clock to the point in time -- prior to Jan. 4, 2012 -- before Cordray was appointed and there was only an acting director for the agency. Without a confirmed director in place, the CFPB only has the authority to supervise mega-banks.

"They couldn't supervise the non-banks," Kaplinsky explained. "So, they couldn't supervise or examine any of the mortgage companies that weren't part of a bank ... originators and servicers."

In addition, enforcement actions can't be taken against non-bank lenders unless they are considered to be service providers to large banks.

"In the mortgage area, they've been conducting investigations of a lot of mortgage companies," he said. "I don't think those investigations can continue until there is a confirmed director."

Kaplinsky isn't sure how the validity of the recently issued mortgage regulations are impacted by the court's decision.

Among final mortgage rules issued this month by the regulator were the loan originator compensation rule, servicing rules, high cost mortgage rule, high cost escrow rule and qualified mortgage rule.

But Kaplinsky noted that "there is definitely a cloud of uncertainty now .. over the legality of all the regs that were issued." He added that no actions can be enforced against non-bank lenders over violations of the rules -- though some of the rules create private rights of action.

While it is highly likely that the government will attempt to stay the order and turn to the U.S. Supreme Court for a review of the decision, Kaplinsky suspects that the conservative-leaning Supreme Court will affirm the decision.

"What it really means, politically, is that Obama is now going to have to deal with the Republicans to make some changes at the CFPB," he said.

One potential change is substitution of a single CFPB director with a commission. Another is subjecting the agency to the congressional appropriations process rather than the "blank check" mechanism in place now.

Cordray was re-nominated to the CFPB director post this week by Obama.

Mortgage Bankers Association President and CEO David H. Stevens issued a statement calling Cordray "thoughtful, balanced, open minded, accessible and communicative" but acknowledging that mortgage lenders "do not, and likely will not, always agree on the best approach to the agency's rulemakings."

Cordray, himself, thanked the president in a statement.

"We understand that our mission is to stand on the side of consumers -- our mothers and fathers, sisters and brothers, sons and daughters -- and see that they're treated fairly," Cordray said. "For more than a year, we have been focused on making consumer finance markets work better for the American people."

But there is little chance that Cordray will face a Senate confirmation hearing at this point, according to Kaplinsky.

"It just seems to me they're gonna have to cut a deal," he said. "And the sooner they cut it the better because with everything that's going on at the CFPB -- it's gonna be a mess if this doesn't get resolved quickly."


NOEL CANNING, A DIVISION OF THE NOEL CORPORATION, PETITIONER v. NATIONAL LABOR RELATIONS BOARD, RESPONDENT INTERNATIONAL BROTHERHOOD OF TEAMSTERS LOCAL 760, INTERVENOR.
Case No. 12-1115, Consolidated with 12-1153, argued Dec, 5, 2012, decided Jan. 25, 2013 (U.S. Court of Appeals for the District of Columbia).


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