Friday, January 6, 2012

U. S. Consumer Financial Protection Bureau starts nonbank supervision but can the new director do it?

SAN DIEGO.  On January 4, 2011, President Obama made a recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB). In a Washington speech, Mr. Cordray stated that the CFBP will begin supervision of mortgage servicers, payday lenders and student loan companies. This nonbank firm supervision is supposed to protect consumers by providing oversight to entities that compete with banks. However, the question is whether the new director has legal authority to supervise nonbanks under the Dodd-Frank Act.

The Dodd-Frank Act, which created the U.S. Consumer Financial Protection Bureau, authorizes such supervision of mortgage originators/servicers once a director is in place. However, the Dodd-Frank Act confers full authority to the CFPB to regulate non-banks only if the Senate confirms the director.
The appointment also potentially undermines the FDIC actions because the director of the CFPB will be a board member of the FDIC.

Proponents of the appointment will point out that, since the President has a constitutional right to make recess appointments, his appointment carries the same weight as the Senate confirmation. Therefore, the Senate confirmation requirement is limiting the President's constitutional authority, resulting in a situation where a federal law (Dodd-Frank) is attempting to trump U.S. Constitution. This, however, does not appear to be a very strong argument. Even though the powers of the President and the Senate might be equal in some instances, the separation of powers doctrine provides for a division and checks and balances between the legislative and the executive branches. The courts will likely require a stronger legal argument in order to uphold an appointment which is contrary to what the federal law plainly states on its face.

Legal status and enforceability of the CFPB nonbank actions is, thus, currently open to challenges.