Will New U.S. Court Of Appeals Decision On ‘Recess Appointments’ Stay Dodd-Frank Powers Granted To CFPB And Vacate Certain Actions?

Holding that recess appointments authorized by the Recess Appointments Clause of the U.S. Constitution are limited to "intersession recesses" - "the period between sessions of the Senate when the Senate is by definition not in session and therefore unavailable to receive and act upon nominations from the President," on January 25, 2013, the U.S. Court of Appeals for the District Court of Columbia1 ruled in the matter of Noel Canning v. National Labor Relations Board (the "Ruling" or the "Canning decision") that the "recess appointments" made by President Obama on January 4, 2012 to the National Labor Relations Board (NLRB) were invalid. Important to the banking and financial services world, President Obama appointed Richard Cordray as the first director of the Consumer Financial Protection Bureau (CFPB) on the same day he made the NLRB appointments, presumably relying on identical justifications as to what constituted a valid recess appointment.

Issues similar to those in Canning are likely to be raised by one or more litigants in a CFPB matter within months, if not sooner. The Canning decision (as concerns the NLRB) and any associated matters (involving the appointment of the CFPB director or other agency appointments) will no doubt be appealed, possibly directly to the U.S. Supreme Court. According to D.C. Circuit rules, the NLRB may file a petition for panel rehearing or rehearing en banc within 45 days of the decision, which would be March 11, 2013.2 The NLRB will also have 90 days to seek certiorari before the Supreme Court,3 but that deadline may be extended by 60 days with the court's permission.4

The Recess Appointment Clause

As background, on the day the "recess appointments" were made, the Senate was operating pursuant to a unanimous consent agreement which provided that the Senate would meet in pro forma sessions every three business days from December 20, 2011, through January 23, 2012. This process was apparently designed, in part, to avoid the possibility of valid "recess appointments."5 The agreement stated that "no business [would be] conducted" during those sessions, but in any case, during the December 23 pro forma session the Senate overrode its prior agreement by unanimous consent and passed a temporary extension to the payroll tax and during the January 3 pro forma session the Senate acted to officially convene the second session of the 112th Congress and to fulfill its constitutional duty to meet on January 3.

As cited in the court's Ruling, the Justice Department had contended6 that the Senate's "pro forma" sessions during its winter break, where no business was generally to be conducted, were insufficient to prevent the President from being able to exercise his constitutional power to appoint officials during a recess.

Although Mr. Cordray was nominated to become the CFPB director in July 2011, his appointment was delayed due, at least in a large part, to the fact that 44 Senate Republicans had stated that they would attempt to block7 any nominee for the position of CFPB director until a deal could be reached for desired CFPB reforms on issues such as potentially expanding the CFPB's leadership from a single director to a five-person commission and making the agency subject to the congressional appropriations process. In any case, on December 8, 2011, the Senate failed to secure cloture on Cordray's nomination. The final vote was 53-45.

Power of the CFPB Without a Director

The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (the Dodd-Frank Act) created the CFPB and according to various authorities and government agencies,8 the CFPB is substantially limited in the scope of its power without a without a director.9 Under this interpretation, although not free from doubt, at a minimum the new powers granted to the CFPB, including the ability to supervise nondepository financial institutions (such as payday lenders or mortgage lenders) were not designed to become effective until an initial CFPB director was approved.10 Since the recess appointment of Mr. Cordray as director, the CFPB has engaged in a number of actions using "new" Dodd-Frank Act powers, including, among other things, initiating federal court enforcement actions against nondepository consumer financial entities, and suing parties for such things as alleged violations of loan modification laws and violations of the Telephone Sales Rule. Further, while the Dodd-Frank Act does authorize the Secretary of the Treasury, in the absence of a director, to perform the CFPB's powers that were transferred to it from other federal agencies, it does not authorize the CFPB to exercise those powers on its own and it does not authorize parties not acting under the authority of the Secretary of the Treasury to exercise such powers.11 12

Current Congressional State of Play

Republicans are still working on their goal of reforming the structure of the CFPB and limiting certain of its powers - very similar to the situation that existed at the time of the recess appointment. On February 1, 2013, a letter by 43 Senators13 was sent to President Obama stating that the senators will "continue to oppose the consideration of any nominee, regardless of party affiliation, to be the CFPB director until [certain] key structural changes [outlined in the letter] are made to ensure accountability and transparency at the Consumer Financial Protection Bureau."

Senator Jerry Moran (R-Kan.), a member of the Senate Committee on Banking, Housing and Urban Affairs, has also reintroduced legislation14 to, in part, replace CFPB Director Richard Cordray with a five-person commission and subject the CFPB to an annual appropriations process. If passed, The Responsible Consumer Financial Protection Regulations Act of 2013 would also subject the CFPB to a regular congressional appropriations process15 and establish what is stated to be a "safety and soundness check" that would ensure "excessive regulations do not cause financial institutions to fail."

S. 190 (introduced by Senator Mike Johanns (R-NE) and entitled "Restoring the...