D.C. Circuit's Invalidation of NLRB Appointments May Affect the CFPB

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.  

Jones Day's Consumer Financial Products & Services team advises large depository and nonbank clients on various regulatory and supervisory issues, including CFPB examinations and enforcement.

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