What happens to the Consumer Financial Protection Bureau’s far-reaching regulations and disclosure mandates governing the mortgage and real estate markets if it turns out that Richard Cordray’s appointment as director was illegal?
That’s developing into more than an academic question, now that U.S. Supreme Court has agreed to rule on a case involving three appointments by President Obama to the National Labor Relations Board. Those appointments were made on the same day — Jan. 4, 2012 — and used the same controversial legal rationale as his recess appointment of Cordray.
A U.S. district court and an appellate court have ruled that Obama’s appointments violated the Constitution. At the time, the Senate was not in a formal recess, but had taken a holiday break after a series of pro forma daily sessions that often lasted barely minutes.
Frustrated by Republican efforts to block his NLRB and CFPB nominees, Obama appointed them anyway, arguing that the Senate had not been doing any substantive business during the days preceding the break, and that the Constitution expressly gives the president the power to make appointments when the Senate is not in session.
The U.S. district and appellate decisions against Obama in the NLRB case have cast into question hundreds of actions taken by the labor relations agency, since without the three Democratic nominees, there would not have been the necessary quorum to take those actions. Could the CFPB’s rulemakings and legal actions taken during Cordray’s time as director face similar jeopardy?
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, a director is required for some of the legislation’s key authorizations to have legal effect, such as supervision on nonbank financial entities. If Cordray’s appointment was unconstitutional, analysts have suggested that at least some of the bureau’s ambitious regulatory actions might be open to legal challenge as well.
Richard Andreano, a partner with the Ballard Spahr law firm and an expert on the CFPB, told me last week that “a determination by a court that Director Cordray’s appointment was invalid would create uncertainty regarding the validity of the rules adopted by the CFPB, including the mortgage rules.”
A Market Watch report June 27 warned that “without Cordray, the bureau won’t be able to write or enforce rules on many mortgage lenders, payday lenders, credit-reporting bureaus and debt collectors.”
Under such a scenario, what would happen to the massive “Qualified Mortgage” rule changes scheduled to reshape the world of home mortgage finance starting next January? What about the overhaul and combination of current real estate and mortgage disclosures under the Truth in Lending Act and Real Estate Settlement Procedures Act (RESPA)? Would they be put on ice?
What about hot-button issues like compensation for mortgage brokers? Or the bureau’s anti-kickback investigations and legal proceedings under RESPA?
The bureau has already concluded two RESPA settlements, one with $15.4 million in penalties, against mortgage, banking and homebuilding industry players.
Are any or all of these now subject to reversal as the result of the legal proceedings now underway?
First, a little context. Cordray’s temporary recess appointment as CFPB director expires Dec. 31, but Obama has asked the Senate to approve him for a full five-year term. That’s not likely to happen, since Republicans in the Senate want to first restructure the CFPB into a bipartisan five member commission and subject it to the congressional appropriations process for its annual funding, which the White House and most Democrats oppose.
Under the current structure, the CFPB not only is headed by a single director with broad powers, but the bureau does not require congressional appropriations to fund its work or pay its 1,200-plus person staff. Instead it is entitled to guaranteed funding directly from the Federal Reserve, based on a formula that now provides upwards of $600 million a year.
Also, it’s important to note that the case the U.S. Supreme Court has accepted for review, Noel Canning v. NLRB, does not apply directly to Cordray. Even if the Supreme Court upholds the decisions of the lower federal courts that Obama’s appointments to the NLRB violated the law, that would not automatically send Cordray packing.
To throw out Cordray’s appointment — and thus jeopardize CFPB actions taken during his tenure at the bureau — a federal district court probably would need a separate case challenging his appointment, following a Supreme Court decision invalidating the NLRB appointments. The district court could then cite the NLRB decision as precedent and rule Cordray’s appointment invalid.
That process could take a couple of years at least, long after the Qualified Mortgage and other rules had taken effect, and would throw the home financing marketplace into chaos.
Given that timetable, the probability of a successful direct legal challenge that endangers the QM, broker compensation or other CFPB actions and rulings seems remote. Also, lawyers say that under the Dodd-Frank statute, in the absence of a CFPB director, the Treasury secretary might be able approve regulations that were thrown into question by the director’s illegal appointment and subsequent departure.
Another possibility: sort of political resolution to the Cordray appointment issue. For example, if the White House concluded from oral arguments in the Noel Canning case this fall that the high court almost certainly will uphold the lower court ruling declaring the appointments unconstitutional, then Obama might be open to negotiations with Senate Republicans on amending Dodd-Frank to restructure the CFPB and maybe retain Cordray beyond his Dec. 31 scheduled departure.
It’s all speculative at this point, of course. But one thing appears certain: The CFPB’s rules and actions to date aren’t likely to be derailed on the basis of a legal challenge to Cordray’s appointment.
Cordray may not be here to stay, but the QM, mortgage servicing, RESPA and other rules scheduled to take effect next year are on track and coming your way.
Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.