Since Friday's decision by the DC Circuit Court of Appeals to invalidate Obama's recession appointments to the NLRB, my e-mail has been ablaze with speculation about the potential effect on banks, thrifts, and credit unions if the rationale applied by the court is also applied to Obama's recess appoint of Recess Richie Cordray as Director of the CFPB. Inasmuch as every pundit, bank lawyer, and crazy uncle will be blogging about this topic ad nauseum, I'm only going to make some preliminary observations, and then feed off the superior brain power of others. That's how I've made a living thus far and I see no reason to change at this late date.
The first observation is that Jay Carney is technically correct while at the same time laughingly intellectually dishonest. While Friday's decision was made with regard to specifically named defendants, none of whom were named "Cordray," all any existing or prospective plaintiff in a lawsuit against Cordray and the CFPB need do is file a complaint (or amend an existing one) to assert the same grounds, and Recess Richie's appointment is in jeopardy. Count on that movie coming to a theater near you, soon.
If the decision is upheld on appeal to the US Supreme Court (and bank on it, it will be appealed), the preliminary comments I've received break down between those of Steve Van Beek, Director of Regulatory Compliance for the NAFCU, who likely will have issued his own blog post already on thiis topic by the time you read this, and those of my friend Joe Lynyak of Pillsbury, who I'll quote (with permission) as follows:
The pertinence of this decision is that it also applies to the appointment of Director Cordray, and hence his appointment may be null and void.
This has two major consequences. First, in order for the CFPB to exercise most of its new authority, Title X of Dodd Frank specifically requires that a Director be appointed. Accordingly, a great deal of the CFPB’s actions since Director Cordray’s appointment—including the issuance of many regulations—may be void.
Second, and of particular concern to the mortgage industry, liability is now created in regard to the regulations issued by the CFPB as part of its Mortgage Initiative between January 10th and January 21st. That is because Section 1400(c)(3) indicates that all amendments made to the lending rules as set forth in Title XIV become effective as of January 21, 2013 if regulations have not been issued. The pertinent section states as follows:
SEC. 1400. SHORT TITLE; DESIGNATION AS ENUMERATED CONSUMER
(a) SHORT TITLE.—This title may be cited as the ‘‘Mortgage Reform and Anti-Predatory Lending Act’’.
(b) DESIGNATION AS ENUMERATED CONSUMER LAW UNDER THE
PURVIEW OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION.—
Subtitles A, B, C, and E and sections 1471, 1472, 1475, and 1476, and the amendments made by such subtitles and sections, shall be enumerated consumer laws, as defined in section 1002, and come under the purview of the Bureau of Consumer Financial Protection for purposes of title X, including the transfer of functions and personnel under subtitle F of title X and the savings provisions of such subtitle.
(c) REGULATIONS; EFFECTIVE DATE.—
(1) REGULATIONS.—The regulations required to be prescribed under this title or the amendments made by this title shall—
(A) be prescribed in final form before the end of the 18-month period beginning on the designated transfer date; and
(B) take effect not later than 12 months after the date of issuance of the regulations in final form.
(2) EFFECTIVE DATE ESTABLISHED BY RULE.—Except as provided in paragraph (3), a section, or provision thereof, of this title shall take effect on the date on which the final regulations implementing such section, or provision, take effect.
(3) EFFECTIVE DATE.—A section of this title for which regulations have not been issued on the date that is 18 months after the designated transfer date shall take effect on such date. (Emphasis added.)
What this means is that virtually everything in Title XIV is now in force—and no one is in compliance—meaning that every loan being originated is in violation of numerous provisions of the Truth-in-Lending Act and RESPA (among others).This exposure may cause the mortgage industry to strongly support the legitimacy of the Cordray appointment.
Steve's preliminary reaction (and I assume that he will expand upon this on his own blog) was "a different take."
According to the Fed and CFPB IG’s report, the CFPB has the authority to issue regulations (i.e., Reg E remittances, Reg Z and Reg X mortgages) for depository institutions without a Director.
I hadn’t fully thought through the “law is effective if the regulations are properly implemented” aspect as it relates to Cordray. That is an interesting angle. But, I’d think that the above would mean that credit unions and banks would be fine under the regulations as the CFPB had that authority regardless of whether they had a “Senate-confirmed Director” or not.
Steve referred me to a blog post from last year which discussed the ability of the CFPB to issue certain regulations with respect to FDIC- and NCUA-insured financial institutions to which those institutions were already subject at the time the CFPB was created, whether or not a "Senate-confirmed Director" was installed.
Joe's response to Steve's points is that "among other things, as a basic matter, if there was authority to issue new regulations, the only person authorized to issue them arguably would be the Secretary of the Treasury, who is in charge of the CFPB until the Director is appointed. The fact that Cordray signed and issued the mortgage regulations has a much force and affect (assuming the DC Ct. of Appeals decision is correct) as Jeffrey Dahmer."
His mention of Jeffrey Dahmer threw a wet blanket on my plans to go out for a dinner of short ribs on Friday night.
Steve's final word to me on Saturday was that "the mortgage brokers and nonbank mortgage servicers are the real ones who would be in deep do-do."
The CFPB didn’t have authority over those entities without a “Senate-confirmed Director” and, one could argue, they aren’t complying with Dodd-Frank as required by January 21, 2013. Depository institutions, on the other hand, would have the regulations (and the added 11 months and 9 days) to follow and comply with as the CFPB had authority (assuming the secret document from the file cabinet or similar) to issue the regs for banks and CUs.
Of course, there could be tons of nuances and issues that come up depending on which authorities (Dodd-Frank or existing TILA/RESPA) to issue certain provisions of the new requirements.
Luckily, my message to CUs is going to be simple – keep working on understanding and complying with the new regs. The other stuff will work itself out.
Steve's reference to a "secret document from a file cabinet" was prompted by an email to both of us from a well-known financial institutions attorney from the Pacific Northwest (who shall remain nameless to protect him from being identified as a reader of this blog, and well as to encourage his continued issuance of unrestrained hot opinions), who let loose with the following regarding Joe's comments concerning Tim Geithner being the only enforceable issuer of CFPB regulations in the absence of a "legitimate" Director:
Reading the Fed/IG material, I see they use the term "Senate confirmed" director as the trigger for CFPB authority. In the absence of a "Senate-confirmed" director, they say, the Treasury Secretary is authorized to perform all these functions. This required me to actually [gasp] read the law. Interestingly, 1066 refers to a Director "that is confirmed by the Senate in accordance with section 1011." Section 1011 doesn't say anything about confirmation, but uses the good old "with the advice and consent of the Senate." I assume (but have not checked my assumption) that a valid recess appointment would satisfy this requirement for the period during which the recess appointment was valid.
With that said, I have to think that the administration knew or suspected that a court would hold that Cordray never had the authority to begin with. What are the odds that they've planned for this all along, and will open the file cabinet and pull out a document in which Geithner delegated (last January) to Cordray the Secretary's authority authority to perform the functions in question. Thus, we can all breathe a big sigh of relief because all the rules were in fact, validly issued, and will remain in effect.
The One has us covered.
Obviously, the man is joking. Would an administration as upright and above-board as this one try to pull some half-baked, back-dated, robo-signed, authorization document out of a file cabinet (or out of its nether regions)? Perish the thought!
A number of talking (i.e., bloviating) heads, including this one, think that unless the SCOTUS overturns Friday's decision, the Republicans may have leverage to tweak FrankenDodd to create a CFPB commission structure that they think will somehow lessen the potential for an all-powerful federal regulator running amok, in return for which they'll stick in a retroactive legislative "fix" to validate whatever regulations the CFPB issued, no matter whose name appeared on the dotted line. Of course, at this early stage, it's way too soon to tell. Nevertheless, as my anonymous correspondent also observed: "One thing's for sure: it will be interesting." Indeed.
"The One has us covered." With what, I'm not certain, but watching and listening to Jay Carney, it's beginning to smell a lot ike flopsweat.
Steve's advice to credit unions is equally applicable to FDIC-insured financial institutions: "keep working on understanding and complying with the new regs. The other stuff will work itself out."