• Recess Appointment Triggers Full CFPB Powers: What This Means For You Nonbank Entities (Yes, You)
  • January 9, 2012 | Authors: David N. Anthony; John F. Costello; Virginia Bell Flynn; Alan D. Wingfield
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Chicago Office ; Troutman Sanders LLP - Richmond Office
  • On January 4, 2012, in the swing-state of Ohio, President Barack Obama used a recess appointment to install Richard Cordray as Director of the Consumer Financial Protection Bureau (CFPB). Mr. Obama said that he was “appointing [Cordray] as America's consumer watchdog.” Cordray’s nomination received opposition from Senate Republicans and the financial services industry, and after a September 2011 hearing, it was clear that Cordray would not receive enough votes for confirmation. In sum, those opposing Cordray’s confirmation wanted structural concessions to the CFPB’s authority, including a leadership panel that makes the Bureau's ultimate decisions instead of vesting power in a single director and bank regulators to have a larger role in the CFPB's oversight.

    The President’s recess appointment is a move that gives the CFPB its full regulatory powers over nonbanks, including mortgage originators and servicers, debt collectors, payday lenders, student loan providers, and check cashers, among others. In fact, the Director, in his very first statement, emphasized the importance of regulating all institutions, bank and nonbank, in saying:

    “I am pleased to say that we will now be able to exercise the full authorities granted to us under the law and begin to supervise these nonbanks. . . . Standing up this program is a top priority for the CFPB. Over the coming weeks we’ll be announcing more information about this program and how it will help to improve the consumer financial markets.”

    Advice and Consent of the Senate
    Pursuant to 12 U.S.C. § 5491 of the Dodd Frank Wall Street Reform Act (Dodd Frank), the director of the CFPB is to be appointed by the President with the advice and consent of the Senate. Id. at § 5491(2)(b). Although Dodd-Frank requires advice and consent, the U.S. Constitution, Article II, § 2, permits the appointment of senior federal officials through a “recess appointment.” For the appointment to remain in effect, though, it must be approved by the Senate by the end of the next session of Congress, or the position becomes vacant again. Id.

    Is This Legal?
    Republicans are portraying the move as potentially illegal, which has led to speculation that Cordray's appointment could be challenged in court. House Speaker John Boehner stated that "[he] expect[s] the courts will find the appointment to be illegitimate.”

    The issue is whether the Senate is actually on a recess. In light of the looming possibility that President Obama could make the recess appointment, Congress has been holding “pro forma” sessions - in which a local senator reports to Capitol Hill every three days to prevent a technical recess - since adjourning for its holiday break.

    Republicans contend that because of these pro forma sessions, no recess appointments can be made, a view the White House is now challenging by installing Cordray as director of the CFPB.

    Nuts and Bolts
    What does this mean for the nonbank institutions, which, up until this point, have avoided the full scope of regulation by the CFPB? The CFPB clearly has been moving in on the mortgage and credit card industries with the implementation of the consumer complaint portals. Moreover, the CFPB will undoubtedly jump on the implementation of the credit card agreement prototype, which is an attempt to shorten the length of the terms and conditions of a credit card agreement, as well as pushing forward the combining of two mortgage documents - the Truth in Lending Act disclosures, and the HUD-1 statement.

    Another significant concern is the power the CFPB has to regulate Unfair, Deceptive, and Abusive Acts and Practices (UDAAP). As Deputy Treasury Secretary Neil Wolin stated, “The agency’s purpose is to address unfair, deceptive, and abusive practices by payday lenders, private student loan providers, debt collectors, and other nonbank lenders, including certain mortgage originators and servicers.”

    With the advent of UDAAP, combined with the CFPB’s alleged ability to regulate all financial institutions, every decision on every product, marketing tactic, or practice potentially is in the target zone for review by the CFPB to ascertain if it is fair, transparent, and appropriate (non-“abusive”). Because the terms “unfair,” “deceptive,” and “abusive” are subjective and broadly defined, they create a danger zone as the regulators begin to define these terms through case decisions. At a minimum, the anticipated day when nonbank financial institutions would enter a period of uncertainty and open-ended regulatory risk has arrived.