The constitutionality of President Obama’s recess appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau (“CFPB”) is being challenged in a lawsuit filed in the U.S. District Court for the District of Columbia this past June. The D.C. Circuit’s decision in Noel Canning v. NLRB, striking down President Obama’s 2012 recess appointments of three members of the National Labor Relationship Board as unconstitutional, has fueled speculation about the validity of actions taken by the CFPB under Mr. Cordray’s direction if his appointment is also deemed unconstitutional. These issues have come into sharp focus as Republican members of the Senate Banking Committee continued to object to Mr. Cordray’s recess appointment and the structure of the CFPB at the confirmation hearing on his re-nomination by President Obama on March 12. Indeed, congressional Republicans have blocked the confirmation of a CFPB Director since the Bureau’s creation, arguing, among other objections, that the CFPB’s structure must be changed to vest power in a bipartisan board rather than a single Director.
Entities seeking to settle enforcement proceedings pending before the CFPB via a consent order, therefore, face a quandary. If the CFPB requires a Director to take valid actions, and Mr. Cordray’s recess appointment is deemed unconstitutional, then consent orders executed by Mr. Cordray may be invalidated. With that potential looming, how does an entity resolve an enforcement proceeding before the CFPB by agreement with confidence that the consent order will remain binding on the government regardless of how the constitutional questions surrounding Mr. Cordray’s appointment play out? Unfortunately, the answer to that question is not clear.
The CFPB was created pursuant to Title X of the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). In Part F of Title X, Congress transferred certain consumer financial protection functions from seven federal agencies to the CFPB. Virtually all of these powers were transferred to the CFPB by the designated transfer date, which was July 21, 2011. Congress also established new authorities for the CFPB in Title X that were not previously explicit under federal law, and many of these new powers became effective upon enactment. For instance, Section 1024 of Title X provides the CFPB with supervisory powers over certain non-depository financial institutions, and went into effect immediately on July 21, 2010.
Structurally, Section 1011(b) of Title X provides that the CFPB is to be led by a single Director. As noted above, however, the CFPB had power before President Obama’s recess appointment of Mr. Cordray in January 2012. Accordingly, during the interim period, there was some debate about: (1) whether the CFPB could exercise its powers without a Director; and if so, (2) whether the CFPB could exercise all of the powers that it acquired under Title X without a Director or only certain transferred powers.
Entities presently seeking to resolve enforcement proceedings with the CFPB by agreement face these same questions with the constitutionality of Mr. Cordray’s recess appointment being challenged. If Mr. Cordray’s recess appointment is invalidated, it is possible that the only acts of the CFPB taken at his direction that would remain enforceable are those that the CFPB could have made without a Director.
Title X does not limit the intra-agency exercise of the CFPB’s powers to the Director exclusively. For instance, Section 1011(b) states that the Director shall appoint a Deputy Director, who shall serve as acting Director if the Director is absent or unavailable. In addition, Section 1012(b) authorizes the Director to delegate any power vested in the CFPB by law to any duly authorized employee, representative, or agent of CFPB. Accordingly, it is possible for an official of the CFPB other than the Director to execute a consent order that would conclude a proceeding.
The ability of the Director to make appointments and delegate power is unlikely to insulate a consent order from an adverse determination on Mr. Cordray’s recess appointment, however. If Mr. Cordray’s recess appointment is invalidated, he presumably had no authority to make appointments or delegate the CFPB’s power. Accordingly, if a consent order executed by Mr. Cordray is invalid because his recess appointment is deemed unconstitutional, the conservative assumption is that a consent order executed by someone exercising authority delegated by Mr. Cordray would be invalid, as well.
It may be possible for the CFPB to take valid actions in the absence of a Director via the Secretary of the Treasury. Section 1066(a) of Title X provides that the Secretary of the Treasury “is authorized to perform the functions of the Bureau under this part until the Director of the Bureau is confirmed by the Senate . . . .” Separate and apart from the validity of his recess appointment, Mr. Cordray has not been confirmed by the Senate. Under the express terms of the statute, therefore, the Secretary of the Treasury may be able to act for the CFPB concurrently with Mr. Cordray while the constitutional questions surrounding his appointment are resolved.
The scope of the Secretary of the Treasury’s authority under Section 1066(a) is also the subject of debate, however. Section 1066(a) refers to “the functions of the Bureau under this part . . . .” Section 1066(a) is in Part F of Title X, which, as stated above, governs the transfer of certain consumer financial protection functions from other federal agencies to the CFPB. Accordingly, some commentators — including the Inspectors General of the Department of Treasury and the Board of Governors of the Federal Reserve System — have taken the position that the interim authority granted to the Secretary of the Treasury to act for the CFPB under Section 1066(a) is limited to the powers transferred under Part F. Pursuant to that interpretation, even if it is assumed that Section 1066(a) presently authorizes the Secretary of the Treasury to execute consent orders that would be binding on the CFPB because Mr. Cordray has not been confirmed by the Senate, that option may not be available to entities engaged in proceedings before the CFPB pursuant to its newly established powers under Title X.
Other commentators, by contrast, argue that Section 1066(a) should be read expansively to authorize the Secretary of the Treasury to perform all of the functions of the CFPB, including those newly established by Congress. Such commentators assert, among other points, that many of the CFPB’s newly established powers became effective immediately upon enactment and before a Director could be confirmed. They argue that it would be illogical to confer interim authority on the Secretary of the Treasury to perform only a portion of the CFPB’s available powers, and that if Congress had intended to define the Secretary of the Treasury’s interim authority so narrowly, it would have done so expressly.
Even if Mr. Cordray’s recess appointment is deemed unconstitutional, his acts taken as Director of the CFPB may be upheld under the de facto officer doctrine, which validates acts performed by someone acting under the color of an official title, making them binding upon the public, even though the legality of that person’s appointment is deficient. Although the doctrine has been applied in a small number of decisions to validate actions taken by officials whose appointments were found to violate the Appointments Clause, the scope of the doctrine is not settled, and it is not applied consistently among the courts. Indeed, some courts have found the doctrine to be unavailable with regard to actions taken by an official who had actual knowledge that his appointment may be constitutionally defective. Ultimately, while an entity may raise the de facto officer doctrine to argue the validity of an act taken by Mr. Cordray that is challenged in court, an entity contemplating a settlement with the CFPB should not rely on the doctrine as a source of authority to enter the settlement.
Congressional Republicans show no sign of wavering on their objections to Mr. Cordray’s recess appointment and the structure of the CFPB. While these objections, alone, do not immediately affect the operation of the CFPB and Mr. Cordray’s authority to act as its Director, the Noel Canning v. NLRB decision and apparent commitment by congressional Republicans to reform the Bureau legislatively place the conclusiveness of resolutions reached in enforcement proceedings before the CFPB on uncertain ground. Interested parties will continue to watch the congressional battle regarding Mr. Cordray’s appointment and the structure of the CFPB for indications of what is to come for the Bureau, as well the judicial challenge pending on the same issues, which has not progressed beyond the pleading stage.
John Dodge of Davis Wright Tremaine LLP is a partner who focuses his practice on the telecommunications, cable, and financial services industries, as well as on state-level consumer compliance issues (JohnDodge@dwt.com).
Liz Drogula is a senior associate with substantial experience in enforcement and regulatory proceedings (LizDrogula@dwt.com).
Andrew Lorentz is a partner in the Washington, D.C. office of Davis Wright Tremaine LLP who focuses his practice on retail financial services. He is a frequent speaker on innovations in payments and financial services. Mr. Lorentz’s clients include major financial institutions, technology companies, and national retailers, which he counsels on financial regulation and payment systems issues. He can be reached at AndrewLorentz@dwt.com.