Impact of President Obama’s Appointment of Richard Cordray as Director of Consumer Financial Protection Bureau
This week, President Obama appointed Richard Cordray as the first director of the Consumer Financial Protection Bureau (the "Bureau") during a Congressional recess. Mr. Cordray's nomination to the position in July 2011 was blocked by Senate Republicans. Mr. Cordray's recess appointment may be challenged on constitutional grounds.
Assuming it withstands constitutional challenge, Mr. Cordray's appointment will enable the Bureau to issue rules and regulate nondepository firms, such as nonbank mortgage lenders and servicers, payday lenders, check cashing firms, and other nonbank lenders. In addition, the Bureau could exercise its rulemaking and enforcement powers under Dodd-Frank's "unfair, deceptive, and abusive" standard. Without a director in place, the Bureau had been unable to assert these powers. This new regulation and oversight of nonbank firms means that the firms will not only have to submit to reporting requirements but also to lending requirements that previously applied only to depository institutions. Companies in these industries should assess their practices in light of this new level of oversight.
Immediate Impact of Appointment
Absent a director, Secretary of the Treasury Geithner has acted as the interim authority overseeing Bureau functions and "administrative services." Secretary Geithner delegated his authority first to Elizabeth Warren and then to Raj Date and members of the "Bureau Implementation Team." The Implementation Team was authorized to exercise most of the powers transferred from existing agencies to the Bureau before a director was confirmed. For example, even without a director, the Bureau could prescribe rules and enforce actions under the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, and other consumer financial laws. Banks, savings associations, and credit unions also fell under the Bureau's authority, even without a director. As such, the Bureau started exercising its bank supervisory powers late last year.
According to the Inspectors General of the Treasury and the Federal Reserve Board, the Bureau could not exercise "newly-established authorities," including the power to supervise nondepository institutions, to write regulations, and to enforce prohibitions against unfair, deceptive, and abusive practices in connection with consumer financial products without a Senate-confirmed director. Now that President Obama has appointed Mr. Cordray, the Bureau may attempt to pursue these efforts—unless the recess appointment is invalidated. Furthermore, while the Treasury's interim authority did not include the power "to prescribe rules under the Bureau's rulemaking authority," the Treasury was allowed to issue advance notice of proposed rulemaking and make public statements regarding the Bureau's intent to regulate particular areas of law. Now that a director is in place, the Bureau may attempt to proceed with final rulemaking, which could happen relatively quickly and will have important implications.
For example, one group of nonbanks covered in Section 1024 of the Dodd-Frank Act that was left largely to the Bureau's rulemaking process is the regulation of so-called "larger participants" in markets for consumer financial products and services, other than markets for residential mortgages, private education lending, and payday lending, which are covered elsewhere in the Section. The Bureau has not defined the term "larger participants" clearly by final rule as required by Dodd-Frank. However, the validity of any regulations under the "newly-established authority" would be subject to constitutional challenge based on the authority of Mr. Cordray to serve as director.
If a company falls within the Bureau's regulatory reach under Section 1024, it will likely face increased compliance costs. The Bureau will require reports and conduct examinations periodically to assess the company's compliance with federal consumer financial protection laws, to obtain information about the company's internal compliance systems and processes, and to look for potential risks to consumers and markets. Companies subject to this new regulation must keep sufficient records to generate reports upon request. The Bureau may also prescribe rules requiring background checks for important employees and bonding or other appropriate financial requirements. Clearly, a company that falls under these new regulations will face increased costs of doing business.
Controversy and Potential Challenges to Appointment
President Obama's appointment of Mr. Cordray during a Congressional recess was met with political opposition from Republicans and could be challenged on constitutional grounds. The U.S. Constitution allows for recess appointments, which have been used by both political parties in the past. However, over the last number of months, Senate Republicans have used procedures (previously used by Senate Democrats in the last presidential administration) to keep the Senate technically in session to prevent recess appointments. Following the recess appointment this week, Republican leaders expressed their belief that the appointment is illegitimate. The White House stands behind its move, claiming the President has the power to make temporary appointments to keep the government running. Assuming the recess appointment survives constitutional challenge, Mr. Cordray will serve for at least the next two years. This appointment adds to the controversy surrounding the Bureau's existence, including its lack of stronger Congressional oversight and arguable independence from Congressional appropriations for funding.
Looking Forward
Despite the controversy surrounding this week's appointment of Richard Cordray and potential challenges to that appointment, we anticipate that the Bureau will seek to move quickly to promulgate rules and assert its powers over nonbank lenders. In a speech on January 3, Mr. Cordray looked forward to the opportunity to "begin working to expand [the Bureau's] program to nonbanks" to ensure that "markets operate fairly, transparently, and competitively." Mr. Cordray also singled out nonbank mortgage lenders, servicers, and payday lenders, implying that a lack of federal oversight would be remedied. The Bureau also is likely to begin enforcement actions that it had withheld prior to appointment of a director. Besides the general challenges of an enforcement action, target companies may also present legal challenges to the enforcement actions based on the authority of Mr. Cordray to serve as director in the first place, given the dispute over the legitimacy of his recess appointment. Companies in the identified industries should prepare themselves for additional oversight and scrutiny in the short-to-mid term.
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