CFPB ALERT: Decision Raises Doubt About Important CFPB Powers
On January 25, 2013, the Court of Appeals for the D.C. Circuit issued a decision that could invalidate many of the Consumer Financial Protection Bureau’s (CFPB) regulations and supervisory activities over the past year. While the decision may be an important milestone for the Bureau, it will not vitiate many important CFPB powers and is likely not the final word on the issue. The court, in Noel Canning, a division of the Noel Corporation v. NLRB, found that President Obama’s recess appointments of three National Labor Relations Board (NLRB) members were unconstitutional because they occurred while the U.S. Senate was holding so-called “pro forma” sessions – thereby creating a circuit split with the Eleventh, Ninth and Seventh Circuits.
The unanimous part of the ruling held that the President’s constitutional authority to fill a vacancy can only be used when one Congress has ended and before a new Congress comes to town, and not during a break between two sessions of the same Congress. On a second part, a two-to-one majority ruled that the vacancy-filling power only applied to vacancies that actually occurred during a between-Congress recess.
Although the decision pertains directly to NLRB recess appointments, CFPB Director Richard Cordray’s January 2012 recess appointment also has been challenged in the same circuit, making it likely to suffer a similar fate presuming Noel Canning stands. If his appointment is deemed unconstitutional, much of the work that the CFPB has undertaken in the past 12 months, including a broad rewrite of mortgage rules, may also be found invalid.
Impact on the CFPB’s Powers
Without a director, the CFPB’s powers are limited to:
- Writing rules, orders and guidance regarding any of the consumer laws that transferred to the CFPB;
- Conducting examinations of and issuing and enforcing orders against banks, savings associations or credit unions with assets of greater than $10 billion; and
- Taking over consumer protection issues related to RESPA and certain consumer rules previously under the authority of the Federal Trade Commission.
Cordray’s recess appointment triggered the CFPB’s full powers, including those from Section 1024, Section 1022, and Subtitle C of Title X of Dodd-Frank. The new powers include:
- The ability to write regulations identifying unfair, deceptive or abusive acts or practices by any party offering a consumer financial product or service (Section 1031 of Subtitle C);
- The ability to write regulations to ensure full, accurate and effective disclosures – both initially and over the term of the product or service – for any consumer financial product or service (Section 1032(a) of Subtitle
C);
- The ability to adopt model disclosures for any financial product or service (Section 1032(b) of Subtitle C);
- The power to examine and supervise non-depository institutions who originate or service mortgage loans, offer private education loans or offer payday loans (Section 1024); and
- The power to determine which entities are larger participants in markets for other consumer financial products and, thus, subject to the supervision and examination (Section 1024).
What does this mean?
Because lower courts are split on both issues in Noel Canning, the case is unlikely to be the last word; indeed, a possible appeal to the U.S. Supreme Court could be in the cards. In the meantime, the decision leaves many of the CFPB’s regulations and rulings since January 2012, especially those regarding nonbanks, in limbo. According to published statements from the CFPB and White House, they believe the ruling “does not apply to Richard Cordray” and “has no direct effect on the bureau.” A more definitive answer on its application to Cordray will likely come from the separate challenge to his appointment by a Texas bank and a conservative activist group in the D.C. District Court, State National Bank of Big Spring v. Geithner; however, that case is still in the early stages of litigation with several pending pre-discovery motions. Despite the CFPB’s pledge to move forward with its work, there is little question that major political and legal battles over the CFPB’s regulatory powers will be forthcoming.
Yet, regardless of whether Cordray’s appointment is upheld, the CFPB still maintains the rule-making and regulatory powers it inherited from other governmental agencies, including the Federal Trade Commission’s consumer protection authority. It also maintains the power to conduct enforcement actions against certain large banks, savings associations, and credit unions. Ultimately, because the CFPB has frequently worked in conjunction with other regulatory bodies such as the FDIC, the CFPB’s ongoing supervisory and enforcement activities may be bolstered by the involvement and parallel enforcement powers of those other regulators.
About Troutman Sanders
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. Troutman Sanders’ CFPB Team monitors the development and activities of the CFPB on its CFPB Report blog and also advises clients on CFPB and Dodd-Frank issues. Additionally, Troutman Sanders’ Financial Services Litigation practice group has successfully litigated a wide variety of individual and class action litigation, as well as other federal and state consumer protection laws now under the umbrella of the CFPB.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result. Follow Troutman Sanders on Twitter.