On January 25, 2013, the United States Court of Appeals for the
District of Columbia Circuit ruled that President Obama's three
"recess" appointments to the National Labor Relations
Board ("the NLRB") on January 4, 2012 were
unconstitutional. See Noel Canning v. Nat'l Labor
Relations Bd., No. 12-1115 (Opinion
here). Noel Francisco of Jones Day successfully argued
the cause for the petitioner before the D.C. Circuit. The
decision may affect a similar challenge to the President's
"recess" appointment, also on January 4, 2012, of Richard
Cordray as Director of the Bureau of Consumer Financial Protection
(the "CFPB"). See State Nat'l Bank of Big
Spring, Texas v. Geithner, No. 1:12-CV-01032-ESH
(D.D.C.). Because of the CFPB's unique nature, including
the necessity that the CFPB have a Director in order to exercise
certain functions, Noel Canning also raises questions
about various ongoing CFPB activities and authority, as well as
prior CFPB actions taken following its Director's
appointment.
The Noel Canning
Decision
Noel Canning challenged an NLRB decision issued against the
company on February 8, 2012. The company argued that the NLRB
lacked authority to issue the order because a valid order requires
a quorum of the NLRB, and three of the five members were not valid
appointments under the Recess Appointments Clause of the
Constitution (the "Recess Clause").
The D.C. Circuit agreed with Noel Canning and held that the three
appointments on January 4, 2012 were invalid. The Recess
Clause states that "the President shall have Power to fill up
all Vacancies that may happen during the Recess of the Senate, by
granting Commissions which shall expire at the End of their next
Session." (Art. II, § 2, cl. 3). The D.C.
Circuit interpreted the Recess Clause to refer only to "the
Recess" that takes place between sessions of the
Senate — and not a more general phrase used to describe all
breaks, as the NLRB argued. Similarly, the Court held that
vacancies that "happen" during the recess are those that
arise between sessions, not those that occur while the
Senate is in session and still "happen to exist" during
recess periods. According to the D.C. Circuit, all decisions
issued by the Board after January 4, 2012 lacked a quorum and are
invalid.
Potential Effect on CFPB
Cordray's appointment as Director of the CFPB occurred on the
same day and during the same "recess" as the NLRB
appointments in Noel Canning. Thus, the reasoning
underlying Noel Canning applies directly to the challenge
of Cordray's appointment in State National Bank.
Precisely when and how the Noel Canning decision is
presented in State National Bank remains to be seen.
(The defendants in State National Bank, including the CFPB
and Cordray, filed a motion to dismiss the complaint on November
20, 2012. Plaintiffs' response to the motion to dismiss
is currently due on February 13, 2013.) In addition, new
suits based on Noel Canning may be filed seeking expedited
and/or injunctive relief from CFPB-related activities.
The Dodd-Frank Act transferred certain powers from existing
agencies to the CFPB and also established new powers for the
CFPB. The CFPB could exercise most powers transferred from
existing agencies before its Director was confirmed. For
example, without a Director, the CFPB 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. However, the CFPB could not exercise
its newly-established powers without a Senate-confirmed
Director. These newly-established powers include, among
others:
- Promulgating rules, regulations, and guidelines related to non-depository institutions;
- Examining and obtaining information from non-depository institutions for the purposes of assessing compliance with consumer financial laws, or detecting risks to consumers;
- Regulating service providers to non-depository institutions;
- Enforcing and promulgating rules and regulations regarding Dodd-Frank's prohibition against "unfair, deceptive, and abusive" acts in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service; and
- Promulgating rules and regulations to require disclosure about any consumer financial product or service, or the issue of model disclosure forms.
If Cordray's January 4, 2012 "recess" appointment is ruled unconstitutional, the validity of certain actions taken by the CFPB may be challenged. Such actions may include:
- Supervisory examinations of nonbank entities (such as mortgage servicers and payday lenders), including any memoranda of understanding, board commitments, or monetary penalties arising therefrom;
- The final rules defining larger participants in the credit reporting and debt collection markets;
- The final rule establishing supervisory authority over certain nonbank covered persons based on risk determination;
- Requests for documents from or examinations of credit reporting agencies, debt collection companies, and nonbanks examined based on risk assessment; and
- Consent orders based entirely upon the CFPB's authority to enforce unfair, deceptive, and abusive acts under sections 1031 and 1036 of the Dodd-Frank Act.
Noel Canning also raises the question whether the
ongoing activities of the CFPB that require a Director are
immediately invalidated, even though State National
Bank has not been decided. If so, this would obviously
affect institutions that have already been examined, are currently
being examined, or are about to be examined by the
CFPB.
While some actions taken by the CFPB did not require the
appointment of a Director — including rulemaking as it
applies to consumer financial laws, and supervisory examinations of
large depository institutions — Noel Canning raises
questions regarding the scope of the CFPB's authority under
those powers. Specifically, the CFPB's power to
"enforce" the consumer financial laws against large
depository institutions as part of its transferred supervisory
examination powers may be challenged. For example, large
depository institutions should consider whether the CFPB has the
power to:
- Enter into memoranda of understanding with or board commitments from large depository institutions to correct violations of consumer financial laws identified as part of the examination process; and
- Require restitution or civil monetary penalties as a result of an examination.
What's Next?
Noel Canning is a significant decision. While the
extent of its effects will not be known for some time, entities
subject to CFPB scrutiny should immediately analyze if and how the
decision affects the CFPB's authority and activities spelled
out under Dodd-Frank. This is especially true for entities
currently being investigated and those who entered into consent
decrees with the CFPB. Large depository institutions and
nonbank entities also should carefully weigh the factors associated
with formally challenging the CFPB's authority or negotiating
with CFPB examiners regarding ongoing examinations as a result of
Noel Canning. Depository institutions will want to
consider the interaction of the CFPB and their primary safety
and soundness regulators, including the ongoing strategic effects
of unresolved consumer issues on their ability to engage in
expansion activities. Nonbank entities should consider
measures to protect themselves regarding privilege issues that
arise from ongoing or scheduled examinations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.