Cordray Controversy Continues

Following President Obama’s January 4th announcement that he would install former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB) using a recess appointment, a hailstorm of controversy has ensued, as lawyers, legislators and industry question the legitimacy of the move – and look for ways to undermine it.


Following the appointment, the Office of Legal Counsel stated that Congress can only prevent the president from making such appointments “by remaining continuously in session and available to receive and act on nominations,” not by holding pro forma sessions.

Senate Republicans, led by Sen. Chuck Grassley, Ranking Member of the Senate Judiciary Committee, accused the president of ignoring more than 90 years of legal precedent in making the recess appointments while the Senate remained in pro forma session. “The Justice Department and the White House owe it to the American people to provide a clear understanding of the process that transpired and the rationale it used to circumvent the checks and balances promised by the Constitution,” Grassley said. “Overturning 90 years of historical precedent is a major shift in policy that should not be done in a legal opinion made behind closed doors hidden from public scrutiny.” The letter was signed by Senate Judiciary Committee members Grassley, Sen. Orrin Hatch (R-UT), Sen. Jon Kyl (R-AZ), Sen. Jeff Sessions (R-AL), Sen. Lindsey Graham (R-SC), Sen. John Cornyn (R-TX), Sen. Mike Lee (R-UT), and Sen. Tom Coburn (R-OK).

On January 12, the Department of Justice issued a memo arguing that pro forma sessions held every third day in the Senate do not constitute a functioning body that can render advice and consent on the president’s nominees. It said the president acted consistently under the law by making the appointments. “Although the Senate will have held pro forma sessions regularly from January 3 to January 23, in our judgment, those sessions do not interrupt the intrasession recess in a manner that would preclude the president from determining that the Senate remains unavailable throughout to ‘receive communications from the president or participate as a body in making appointments,’” Virginia Seitz, assistant attorney general for the Office of Legal Counsel, wrote in the memo dated Jan. 6.


On the legislative front, there are two issues: the legislation that created Dodd-Frank, and the countless bills that will soon be introduced in response to the president’s recess appointment.

The conventional wisdom in both industry and government circles has been that the CFPB’s authority will be limited until it has a director, and that once it has a director, it will assume its full powers. Not quite. As Dodd-Frank was drafted, Section 1066 reserves many of the bureau’s powers for the Secretary of the Treasury “until the Director of the Bureau is confirmed by the Senate.” As Cordray was appointed through a recess appointment, rather than the Senate confirmation process, he will still have certain constraints on his authority. Specifically, the section transfers consumer financial protection functions of several other federal agencies to the CFPB Director.

In the absence of a Senate-confirmed director, those powers, which include the authority to regulate non-banks, should, according to statute, remain with the Secretary of the Treasury. Despite this, the CFPB has announced that it has launched its non-bank supervision program. Should that supervision become enforcement, it remains to be seen whether enforcement actions could withstand a court challenge.

Where the current legislation has raised questions, two freshman House Republicans are making moves to answer them.

On January 10, Rep. Diane Black (R-TN) introduced a House resolution “Disapproving of the President's appointment of four officers or employees of the United States during a period when no recess of the Congress for a period of more than three days was authorized by concurrent resolution and expressing the sense of the House of Representatives that those appointments were made in violation of the Constitution.” The resolution has 70 Republican co-sponsors.

On January 13, Rep. Jeff Landry (R-LA) introduced the Executive Appointment Reform Act (EARA), which would eliminate loopholes in the U.S. Code that allow for the payment of certain recess appointed individuals and also place limitations on an appointee’s ability to provide voluntary or gratuitous service. Additionally, the legislation would prevent all regulations hailing from the CFPB from becoming final until the director has been confirmed by the Senate. The bill has 22 Republican co-sponsors.


While few expected industry to enter the fray, a few major players have spoken out. 
Citigroup said that it does not view the move as a recess appointment and said it expects a court challenge. The U.S. Chamber of Commerce, a vocal critic of the bureau, has not ruled out a lawsuit, but said Friday, “We are not going to sue today.”

Cordray has said that he is working closely with industry leaders and lobbyists to ensure that their concerns are heard. “What I want to say to business is: They should embrace the bureau,” he said. “Not only are we going to protect consumers, but we are going to support the honest and responsible businesses in the financial marketplace” who were undercut by companies that did not “adhere to the same standards.”

The White House has held firm that the move was constitutional. “The Senate has effectively been in recess for weeks, and is expected to remain in recess for weeks,” White House spokesman Eric Schultz said in a statement. “Gimmicks do not override the president’s constitutional authority to make appointments to keep the government running,” he said.

Despite Republican Objections, Obama Installs Cordray as CFPB Director

President Obama announced this afternoon that he will install Former Ohio Attorney General Richard as director of the Consumer Financial Protection Bureau by “recess appointment.” The recess appointment comes despite the fact that the Senate is not officially in recess. The appointment will almost certainly be challenged in court.

Speaking in Shaker Heights, Ohio, the president said “Today I’m appointing Richard as America’s consumer watchdog. That means he’ll be in charge of one thing: looking out for the best interests of American consumers. His job will be to protect families like yours from the abuses of the financial industry.” The president went on to criticize Senate Republicans for blocking Cordray’s confirmation. “The only reason Republicans in the Senate have blocked Richard is because they don’t agree with the law setting up the consumer watchdog. They want to weaken it. Well that makes no sense at all.”

Now that the bureau has a director, it will assume its full authority under Dodd-Frank, which includes oversight authority over non-bank financial institutions. In the five-and-a-half months since the bureau opened its doors, mortgage servicers, debt collectors, and payday lenders have been outside of its purview. Now, these and other non-banks will likely be subject to regulatory and enforcement actions by the CFPB.

While many Democrats are claiming victory, all signs suggest that the battle is just beginning for Cordray. Many Republicans are already threatening court challenges, and Rep. Patrick McHenry, Chairman of the House Financial Services Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs wrote to Cordray today, requesting that he testify before the Subcommittee on January 24th.

This will not be the first time a presidential recess appointment has ended up in a courtroom. In 1921, the attorney general, at the request of the president, held that recess appointments could be made during an almost month-long recess, but noted that recess appointments during short recesses are unconstitutional finding that “ the term ‘recess’ must be given a ‘practical construction.’”

According to a report released by the Congressional Research Service last month, no recess appointments have been made in recent history during recesses lasting fewer than 10 days. During the Clinton Administration, the Department of Justice argued that any recess longer than three days meets the Constitutional standard for recess appointments. The DOJ did not claim that a recess appointment made in a recess of three days or less is unconstitutional, rather, only that it would present a “closer question.” It remains to be seen who will bring the suit, though there are undoubtedly a number of third parties that have a vested interest in the issues.

Senate Democrats were vocal opponents of recess appointments during the George W. Bush Administration. When President Bush recess appointed John Bolton as Ambassador to the United Nations, then-Senator Barack Obama (D-IL) said that a recess appointment was “the wrong thing to do,” and added that a recess appointee is “damaged goods… somebody who couldn't get through a nomination in the Senate. And I think that that means that we will have less credibility...” Also during the Bush Administration, Senate Majority Leader Harry Reid called recess appointments “mischievous” and “an end run around the Senate and the Constitution.” Now that the tables have turned, Senate Republicans have several of their Democrat colleagues on the record making similar comments. 

The Senate failed to confirm Cordray on December 8, 2011, when it voted 53-45 to end the filibuster and proceed with the confirmation, falling short of the 60 votes needed to proceed. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted “present.”

Forty-Five Republican Senators signed onto a letter vowing to oppose any nominee for director until the CFPB is restructured. Specific reforms suggested in the letter were: (1) the establishment of a board of directors; (2) the requirement that the CFPB submit a budget request and go through the appropriations process just like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission; and (3) the oversight of CFPB regulations by Federal bank regulators to ensure that such regulations do not needlessly cause bank failures.

Members on both sides of the aisle issued strongly-worded statements on the president’s move:

Senate Minority Leader Mitch McConnell (R-KY), who has led the Republican effort to block the confirmation, blasted President Obama’s decision, accusing him of “arrogantly circumventing the American people with an unprecedented ‘recess appointment’ of an unaccountable czar.” McConnell described the historical precedent of limiting recess appointments to recesses lasting ten days or more and said “breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’s role in providing a check on the excesses of the executive branch.”

Senate Majority Leader Harry Reid (D-NV) said, “I support President Obama’s decision to make sure that in these tough economic times, middle-class families in Nevada and across the country will have the advocate they deserve to fight on their behalf against the reckless practices that denied so many their economic security… I hope that moving forward, Republicans will work with Democrats to address the concerns of middle-class Americans, instead of turning every issue into a partisan fight.”

House Speaker John Boehner (R-OH) issued a statement calling the move “an extraordinary and entirely unprecedented power grab by President Obama that defies centuries of practice and the legal advice of his own Justice Department," Boehner said. “This action goes beyond the President’s authority, and I expect the courts will find the appointment to be illegitimate.”

Senate Banking Committee Chairman Tim Johnson (D-SD) said, “With Richard Cordray leading the Consumer Financial Protection Bureau, Americans will finally get the consumer protections they deserve. Mr. Cordray is eminently qualified for the job, as even my Senate Republican colleagues have acknowledged…It’s disappointing that Senate Republicans denied him an up-or-down vote, especially when it’s clear he had the support of a majority of the Senate.”

House Financial Services Committee Chairman Spencer Bachus (R-AL) said, “The President’s unprecedented decision to attempt to circumvent the Constitution and ignore the law he himself signed is the clearest indication yet that he has abandoned any effort to work in a bipartisan manner to strengthen accountability and oversight of this new government bureaucracy… In doing so, President Obama has delegitimized the CFPB and has opened the agency up to legitimate legal challenges that will cripple it for years. The greatest threat to our economy right now is uncertainty, and the President just guaranteed there will be even more uncertainty.”

Senate Banking Committee Approves Cordray Nomination

The Senate Committee on Banking, Housing and Urban Development voted this morning to confirm former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau. The committee approved the nomination by a party-line vote of 12 to 10, with all Republican members voting against, as they have repeatedly vowed to do until the CFPB is restructured. The nomination must now come to a vote before the full Senate to complete Mr. Cordray’s confirmation. However, Minority Leader Mitch McConnell has united the Republican caucus to block the nomination (until the bureau is restructured), and it is unclear when the Senate will actually take up the nomination. The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act and officially opened its doors on July 21, 2011, but its powers are limited until it has a Senate-confirmed director.

The Senate Committee also unanimously approved the nominations of Alan B. Krueger to be a Member of the Council of Economic Advisers; David A. Montoya to be Inspector General, U.S. Department of Housing and Urban Development; Cyrus Amir-Mokri to be an Assistant Secretary of the Treasury, U.S. Department of the Treasury; Patricia M. Loui to be a Member of the Board of Directors, Export-Import Bank of the United States; and Larry W. Walther to be a Member of the Board of Directors, Export-Import Bank of the United States.

The CFPB Versus Congressional Appropriators: Round One

In prepared remarks before the 75th anniversary celebration of the Consumers Union on Tuesday, the Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau (CFPB)—Elizabeth Warren— took the opportunity to counter ongoing attacks levied on the new agency from Congressional Republicans who, as Warren says, “are still trying to chip away at its independence.”

Warren’s comments yesterday specifically referenced the escalating efforts by House Republicans’ to strip the CFPB of its independent funding through the Federal Reserve, moves that appear to be the GOP’s most potent tools at increasing Congressional oversight of the CFPB and curbing its wide-ranging regulatory authority over both banks and non-banks.

As signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) contains provisions intended to insulate the CFPB politically by funding it outside of the Congressionally-approved discretionary spending process. Instead, the CFPB, once fully established on July 21, 2011, will possess a dedicated funding source through a set percentage of the Fed’s operating budget – resulting in an annual budget as high as $450-$500 million, or nearly double the Federal Trade Commission’s (FTC) budget for Fiscal Year 2010.

Last week, Rep. Randy Neugebauer (R-TX), Chairman of the Financial Services Subcommittee on Oversight and Investigations and one of the most ardent CFPB critics on Capitol Hill, introduced H.R.557, the Consumer Financial Protection Oversight Act of 2011, which would remove the CFPB from the Fed and transfer it over to the U.S. Treasury Department. According to Neugebauer, “Given the significant and perhaps over-regulating powers the CFPB has been given by the Obama Administration, Congress must have a say on the appropriation of taxpayer money funding this agency’s operation.”

As shorter-term strategy, House Republicans have also included a provision within H.R.1, the Full Year Continuing Appropriations Act —a must-pass piece of legislation that will fund government operations through FY11—that would limit the initial funding for the CFPB to $80 million, which represents a steep cut from the $134 million the White House requested for the agency’s start-up costs.

However, Warren warned during her Consumer Union remarks that such efforts to weaken the CFPB’s independence would diminish the agency’s ability to perform its regulatory functions.

“Politicizing the funding of bank supervision would be a dangerous precedent, and it would deprive the CFPB of the predictable funding it will need to examine large and powerful banks consistently and to provide a level playing field with their nonbank competitors,” said Warren. “While the banking regulators charged with preserving the safety and soundness of financial institutions and ensuring consumer protection compliance by smaller banks would continue to receive independent funding, the agency in the financial regulatory system with lead responsibility for protecting consumers would face a different set of rules - rules that threaten its independence.”

Although the CFPB funding debate is currently drawn on strictly partisan lines, the issue touches on a larger debate surrounding Congress’s oversight role over federal agencies and its inherent powers over the federal purse. The GOP’s position may appeal to moderate Democratic appropriators –particularly those on the Senate side – who could support a larger Congressional role in the CFPB budget process in order to preserve Congress’s spending prerogatives.

It’s still too early to tell where this debate will go – but one thing is certain: Congressional Republicans are on the attack, and Elizabeth Warren and the Obama administration will be forced into playing defense in the critical days ahead for the CFPB.

HR 557 - Consumer Financial Protection Bureau Funding (PDF)

Retiring Senate Banking Committee Chairman Predicts Tough Road Ahead for a Director-Less CFPB

Perhaps no section of the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act is more controversial on both Capitol Hill and within the financial industry than that which creates an independent Consumer Financial Protection Bureau (CFPB)—and according to the outgoing Senate Banking Committee Chairman, until the President nominates and the Senate confirms a permanent CFPB director, the entire bureau may be at risk in the next Congress.

“Look, this was a controversial section of the bill—don’t have any illusions,” said Chairman Christopher Dodd (D-CT) in reference to the CFPB during a Banking Committee hearing yesterday that received testimony from the heads of the various financial regulatory agencies. “Regardless of the outcome of the election in November, there are going to be people trying to get rid of this bureau, and it’s going to be a lot easier to get rid of it if it hasn’t gotten up and gotten started demonstrating the value and importance of it. So it’s at risk in my view, until we get someone in running the place and demonstrating what it can do and the kind of rules it’s going to develop.”

President Obama’s decision on September 16 to temporarily appoint Elizabeth Warren as "special adviser" to the President and the Treasury Secretary for standing up the CFPB has failed to appease Chairman Dodd, who has repeated such ominous warnings to the administration over the past few months. When taking the newly emboldened GOP and their recent rhetoric into account, Dodd’s sentiments don’t appear to be overstated.

During yesterday’s hearing, Ranking Member Richard Shelby (R-AL), stated his belief that changes to Dodd-Frank are “inevitable” as lawmakers, “when necessary, visit the law and make changes consistent with our findings and the demands of the electorate.” More directly, at a Reuters Washington Summit last week, Shelby referred to the CFPB as a “mistake” and stated his intention to revisit the issue if he assumes the committee chairmanship with a Republican takeover of the Senate in November.

The feelings appear to be mutual for Shelby’s counterpart in the House and the potential Financial Services Committee Chairman in waiting, Spencer Bachus (R-AL), who has continued to lob sharp criticism at the CFPB, referring to it in speeches as the “Credit Allocation Bureau.” In mid-September, GOP leaders even sent a pre-election signal that January can’t come soon enough for their caucus, as House Appropriations Committee Ranking Member Jerry Lewis (R-CA) led an unsuccessful GOP attempt to block funding for the Treasury to implement the Dodd-Frank provisions.

Responding to Dodd’s call for action, Deputy Treasury Secretary Neal Wolin attempted to underscore the administration’s sense of urgency yesterday, testifying that President Obama will formally nominate a CFPB Director “soon” and that “he’s reviewing candidates right now.”

Warren Wins for Now

Seeking to avoid a bruising confirmation battle in the Senate, President Obama appears poised to create a post for consumer advocate Elizabeth Warren in which she would guide the creation of the new Consumer Financial Protection Bureau (CFPB). By making her a "special adviser" to the President and the Treasury Secretary, the President would avoid having to send Warren's name to the Senate for confirmation as the head of the CFPB. This end-run around the Senate is likely to cause consternation on both sides of the aisle. Whether the GOP takes over the Senate or not, the Senate Banking Committee is likely to keep a very close eye on Ms. Warren's activities. Numerous hearings and requests for information could well be in her future. Taking this post would complicate her chances of ever becoming the permanent head of the bureau, as the Senate would not likely be disposed to ratify this approach to installing leadership there. So this may be an effort by the Administration to reward her for her initiative in pushing for the bureau before they give the job to someone who is confirmable.

Finale - President Obama Signs the Dodd Frank Wall Street Reform and Consumer Protection Act into Law

Earlier today, President Obama signed into law the Dodd Frank Wall Street Reform and Consumer Protection Act—marking the completion of the legislative road and the beginning of the regulatory road for the financial reform bill that is now the law of the land.

In his remarks at the bill signing, the president thanked congressional leaders, praised the effort, and described the package as a "...set of reforms to empower consumers and investors, to bring the shadowy deals that caused this crisis into the light of day, and to put a stop to taxpayer bailouts once and for all."

The 2,300 page bill now falls into the hands of the Treasury Secretary and other financial regulators to execute. In the coming days and weeks, Financial Reform Watch will be "watching" for many things including whom the president nominates to be the head of the new Consumer Financial Protection Bureau; when the first meeting of the Financial Stability Oversight Council will be scheduled; and which proposed rules begin to flow from the financial regulators tasked with implementing the mandates of the Dodd Frank Act.