CFPB Powers Could Be Invalidated Following Ruling on NLRB Recess Appointments

25 January 2013 Publication

Legal News Alert: Consumer Financial Services

On January 25, 2013, the U.S. Court of Appeals for the D.C. Circuit ruled that President Obama’s purported “recess appointments” to the NLRB last year are constitutionally invalid. It is critical to note that President Obama appointed Richard Cordray as Director of the Consumer Financial Protection Bureau (Bureau) on the same day he made the NLRB appointments, relying on the same precedent and justification. While the D.C. Circuit’s ruling does not directly apply to Director Cordray’s appointment, it will undoubtedly be asserted in pending (and perhaps future) challenges to the Cordray appointment—and to the Bureau’s asserted exercise of its powers since his purported appointment.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), which established the Bureau, the Bureau was to obtain authority to supervise and regulate certain persons and entities only after a Director was appointed and confirmed. These included: (i) mortgage brokers, originators, and servicers; (ii) “larger participants” in a market for consumer financial products or services (to be determined by the Bureau’s rulemaking which, to date, has included consumer reporting agencies and debt collectors with revenues over certain thresholds); (iii) persons or entities who offer or provide private education loans; and (iv) other persons or entities whom the Bureau determines engage in conduct that poses risks to consumers in the offering or provision of consumer financial products or services. (Under the Dodd-Frank Act, the Bureau’s supervisory and enforcement authority without a Director is limited to banks, thrifts, and credit unions with total assets exceeding $10 billion.) If the reasoning in the D.C. Court’s ruling is adopted in a challenge to Director Cordray’s appointment or in a challenge to the Bureau’s actions, a number of supervisory and regulatory actions taken by the Bureau could be found invalid.

The Obama administration has argued that the U.S. Senate was in a “recess” when the president made the appointments, such that he did not need Senate confirmation for the appointments as normally required by the U.S. Constitution. However, the Senate was holding periodic “pro forma” sessions every three days at the time of the appointments, which are typically a short formality in which no substantial business occurs. President Obama contended that the “pro forma” nature of the sessions did not make the Senate available to confirm his nominations, so he was free to make them unilaterally.

In the unanimous court opinion regarding the NLRB appointments, the D.C. Circuit rejected the president’s arguments and looked at the substantial constitutional issue. It concluded that “recess appointments” may be made only during breaks between sessions of the U.S. Congress (also known as “intersession recesses”), rather than during breaks within a session of Congress (known as “intrasession recesses”). The court’s ruling effectively rejects a longstanding practice by various presidents during the past 90 years, which the court suggested has been an abuse of presidential power by stating that “[t]he dearth of intrasession appointments in the years and decades following the ratification of the Constitution speaks far more impressively than the history of recent presidential exercise of a supposed power to make such appointments.” The D.C. Circuit also decided that only those position vacancies that arise while the Senate is in intersession recess can be potentially filled by the president with a proper recess appointment.

The potential ramifications of this decision are substantial, and could go so far as to mean that the position of the Bureau’s Director—and any other vacancy to an executive branch position requiring Senate confirmation that opens while the Senate is in session—could not be filled during any future Senate recess. In light of the significance of the decision that, if adopted in a challenge to Director Cordray’s appointment, potentially includes the invalidation of many of the Bureau’s actions taken during the past year, it is a virtual certainty that this decision will be appealed to the U.S. Supreme Court and that the high court will likely choose to review it. It is highly probable that the Obama administration will seek a stay of the D.C. Circuit’s ruling pending an appeal. However, until the Supreme Court issues a ruling, or until the Bureau has a Director who has been confirmed by the Senate through traditional constitutional methods, the ability of the Bureau to engage its full powers against nondepository institutions is in substantial doubt.

Additionally, if the D.C. Circuit’s decision is upheld by the Supreme Court (or if the Supreme Court denies review), it will constitute a dramatic shift in the ability of the president to bypass the Senate and make appointments without that body’s advice and consent. This represents a significant tilting of power back to the Senate in this important “checks and balances” issue. The decision is Noel Canning v. National Labor Relations Board, No. 12-1115.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Timothy S. Crisp
Madison, Wisconsin

Ryan N. Parsons
Milwaukee, Wisconsin