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July 28, 2014 • Issue 14:07:02

Recess appointment rebuke raises CFPB debate

On June 26, 2014, the United States Supreme Court ruled unanimously that President Barack Obama overstepped his constitutional recess appointment powers when he made several controversial federal appointments without the approval of the U.S. Senate. The ruling may affect the payments industry, and specifically, the prepaid card industry, because the director of the relatively new Consumer Financial Protection Bureau, which has regulatory authority over financial services, was appointed under the same circumstances as the appointments the court just ruled on.

The Supreme Court's 9-0 decision came in regard to a federal lawsuit concerning the Jan. 4, 2012, appointment of three individuals to the National Labor Relations Board, which resolves disputes between businesses and unions. The Supreme Court justices agreed Obama did not have the constitutional authority to make those appointments.

The U.S. Constitution allows the president to make appointments without the Senate's approval only when Congress is officially in recess. But the court said Congress was in session when Obama made the appointments. Therefore, the three individuals (out of five total on the board) were appointed unconstitutionally, which means the decisions that the NLRB arrived at during their tenure on the board were legally invalid. According to the Cleveland, Ohio-based law firm BakerHostetler, the NLRB will now have to reissue hundreds of prior decisions.

On the same day Obama made the NLRB appointments, he appointed Richard Cordray to helm the CFPB. Since the NLRB appointments were ruled unconstitutional by the highest court in the land, it follows that Cordray's appointment will be similarly ruled, if and when the court hears the case. (A separate lawsuit concerning the constitutionality of Cordray's appointment is working its way through the court system.)

CFPB still on firm ground

Opinions differ on the outcome of a potential Supreme Court rejection of the Cordray appointment. On the June 26 CFPB Monitor blog of the law firm Ballard Spahr LLP, Alan S. Kaplinsky wrote that a future unconstitutionality ruling will come to nothing.

Kaplinsky noted that Cordray was officially confirmed by the Senate in July 2013, and his decisions up to that time were subsequently ratified. "While someone could theoretically challenge the validity and effect of Director Cordray's ratification, we highly doubt that such a challenge would succeed," he stated.

John E. Lande, writing on the Iowa Banking Law Blog, agreed with Kaplinsky. "There will likely be subsequent litigation over this issue," Lande said. "What is clear is that this ruling will have no impact on the existence of the CFPB, or, in the long run, on the CFPB's ability to use its rulemaking authority."

But Rep. Jeb Hensarling, R-Texas, who serves as Chairman of the House Financial Services Committee, disagreed. "By the time the Senate confirmed Mr. Cordray in July 2013, he had served as director for 18 months without legal authority," Hensarling said in a statement. "This fact calls into question the legality of the official actions he took during this time period and may represent a legal risk for the CFPB."

No oversight?

The formation of the CFPB in 2012 highlighted a sharp divide between Democrats and Republicans. Conservative lawmakers objected to the structure of the CFPB and its concentration of regulatory authority in one individual – the agency's director. Obama's so-called recess appointment of Cordray arose out of Senate Republicans' employment of a procedural tactic that kept the Senate in session but didn't allow business to be conducted.

The conservative think tank Competitive Enterprise Institute, no fan of the current structure of the CFPB or of the Dodd-Frank Reform Act of 2010 which spawned the consumer watchdog agency, is behind the lawsuit challenging the constitutionality of Cordray's appointment. Along with co-plaintiffs in the case, the Texas-based State National Bank of Big Spring and the 60 Plus Association Inc., the CEI issued an amicus curiae (friend of the court) brief to the NLRB lawsuit that casts the CFPB as an agency that has few checks and balances on its power.

Congress has two mandated powers designed to provide oversight and control of federal agencies, enumerated in the Appropriations and the Appointments clauses of the U.S. Constitution. The legislature can defund agencies it deems abusive or out of control, while the Senate can approve or reject applicants nominated by the president to federal positions.

Unlike most government agencies, the CFPB's budget is not controlled by Congress. The brief said the CFPB operates as an "independent bureau" within the Federal Reserve System, with an annual budget of nearly $600 million. As stipulated by the Dodd-Frank Act, "Congress is prohibited even from attempting to 'review' the CFPB's non-appropriated budget," the brief stated.

Since Congress doesn't have the "power of the purse" over the CFPB, its only controlling mechanism is the Appointments Clause, the brief said. "If presidents can evade the confirmation process by deeming the Senate to be in 'recess' and appointing nominees unilaterally, then Congress will have lost even this last, limited means of oversight," the brief added.

The brief noted that, under Cordray's direction, the CFPB has "promulgated consequential rules" in areas such as lending standards and mortgage servicing procedures, as well as wire transfers, which directly affects the payments and prepaid card industries.

Privacy concerns

A July 1, 2014, American Banker article said critics of the CFPB are raising data privacy concerns as the agency collects consumer data to build a national mortgage database. The article, CFPB Data Collection Effort Sparks Privacy, Security Concerns, quoted Hensarling as saying, "Without a doubt, this national mortgage database is an unwarranted and shocking intrusion into the privacy of American citizens. It is a database I would fully expect to see in either Russia or China, but I'm appalled to see it in the United States of America."

A bill to reform the CFPB passed the House of Representatives last February. H.R. 3193, a package of bills given the title of the Consumer Financial Freedom and Washington Accountability Act, passed with a 232 to 182 vote and is designed to change the structure of the agency to curtail what the bill's supporters say is the agency's potential for regulatory overreach.

Among other things, the bill would replace the CFPB director with a five-member commission, subject the agency to the regular appropriations process controlled by Congress and require the agency to get permission from consumers before it can access their personal records. The bill is now in the Senate. As of this writing, no action has been taken on it. end of article

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