The battle over the Consumer Financial Protection Bureau is moving from Congress to the courts.
When President Obama installed Richard Cordray as director of the CFPB through a recess appointment last week, he set the stage for a legal showdown over the bureau's authority that could take years to resolve. The question isn't if a lawsuit will be filed, but when—and by whom.
Observers expect Senate Republicans and others to challenge the appointment on the grounds that the Senate was not actually in recess. But industry groups may have another argument: that the Dodd-Frank Act does not confer full authority on the bureau without a Senate-confirmed director.
“My reading of Dodd-Frank is that the nonbank authorities don't come into play until you have a director confirmed by the Senate,” said Mark Calabria, a former top aide to Sen. Richard Shelby, and the director of financial regulations studies at the Cato Institute. “If I was a payday lender that was sued by this agency, I would countersue that they don't have the authority to do it on those grounds, [that] this authority was not in place.”
Industry observers said the move casts a shadow of uncertainty over everything the agency does going forward. It's not only bad for banks, but it's bad for the agency and consumers, they argued.
“Even though the consumer advocates I'm sure will cheer this as a terrific move by the president here, I think if they think long and hard about it, they too will be concerned,” said Alan Kaplinsky, a partner with Ballard Spahr. “What good is it, no matter what the bureau does, if everything is going to be challenged and tied up in the courts?”
But consumer advocates said they were thrilled with the appointment, and were not concerned about the possibility that CFPB's actions would be tainted by legal uncertainty, nor about questions surrounding the validity of a recess-appointed director versus one confirmed by the Senate.
“There is no reason to think that it is illegal to make a recess appointment in three or fewer days,” said David Arkush, the director of Public Citizen's Congress Watch division. “I do think that the likelihood of a successful action is so remote that it shouldn't cast any uncertainty over these actions.”
Frank Keating, the president and CEO of the American Bankers Association, said the move complicates compliance efforts of banks, and puts the bureau's actions “in constitutional jeopardy.”
“Moreover, with this appointment, the president has also altered the composition of the board of the FDIC, potentially undermining its official acts,” Keating said. “This is at the same time that FDIC appointments, including that of its chairman, are pending in Congress.”
The legal challenges could come from a number of places, including Capitol Hill, entities regulated by the CFPB or by an industry trade group.
