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The payments industry ramifications of a federal appeals court’s decision that President Obama’s National Labor Relations Board appointments were unconstitutional may not be readily apparent, but they could be huge. That’s because the logic behind the ruling could invalidate Richard Cordray’s appointment as director of the CFPB, drastically changing what the bureau can and cannot do, and casting in doubt many of its previous decisions as well.
To get a firmer grasp on what the NLRB decision means for the CFPB, PYMNTS.com spoke with David Evans, economist and founder of Market Platform Dynamics, who teaches at the University of Chicago Law School. Evans has extensive experience writing about the CFPB and has twice testified before congress on consumer financial regulations, and his take on the matter holds significant weight.
Our conversation with Evans is below:
PYMNTS.com: What’s the issue in the NLRB decision by the DC Circuit that came down last Friday, and what does it have to do with the payments and consumer finance business?
David Evans: The NLRB decision is about when it is constitutional for a President to make an appointment without the Senate’s consent because they are in recess. It turns out that President Obama appointed Richard Cordray to be the Director of the Consumer Financial Protection Bureau — the CFPB — in the same period and in more or less the same way he appointed the NLRB commissioners who are at issue in this case. The case arose because a company was subject to an NLRB decision. The company claimed it wasn’t a valid NLRB decision because the NLRB didn’t have a quorum of legitimate commissioners.
I want to get back to Cordray, but let’s talk about the DC Circuit decision. What did it find?
The DC Circuit Court of Appeals concluded that President Obama’s appointments to the National Labor Relations Board were unconstitutional. The Senate is supposed to approve appointments. There’s an exception under the U.S. Constitution if the Senate is on recess. Then the President can appoint someone temporarily. The Court said that the Senate wasn’t in fact on recess and that therefore the President didn’t have the right to do that. It also said that the President can only make appointments that happened during the recess.
What’s the reasoning by the court?
They based their decision on a reading of the U.S. Constitution. The appointments clause says, “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. During recesses of the Senate, the President may appoint officers, but their commissions expire at the conclusion of the Senate's next session.”
They focused on two issues. First, they said the Framers of the Constitution really meant the Recess and not just any time the Senate goes on break. They pointed out that it wouldn’t make any sense if the President could bypass Senate confirmation just because the Senators went on a lunch break. They concluded that the recess meant the recess between Sessions of Congress. Second, the majority (two of three judges) said that the Framers really meant happen during and not vacancies that existed before the recess. Basically — my words, not theirs — the DC Circuit seems to have concluded that the Framers of the constitution were worried about how the President could run the country between the time Congress got on their horses and headed for their long journeys back home and when they came back. But they also concluded the Constitution didn’t give the President carte blanche to appoint people whenever the Senate was on a break.
What happens now?
The NLRB can appeal this to the full DC Circuit and hope they get a different answer. Or they could appeal it directly to the Supreme Court. Given that this is a pretty important constitutional question plus the fact that the 11th Circuit reached a different conclusion, it would seem pretty likely the Supremes will take this one.
Let’s get back to the CFPB. What does this mean for Cordray?
Well, someone could make the same arguments concerning Cordray that were made against the NLRB Commissioners. The facts concerning the manner of appointment are exactly the same. So it seems inconceivable that the result would be any different. If the DC Circuit’s decision in the NLRB decision case is upheld, Cordray’s appointment will have been unconstitutional.
What’s the implication for the CFPB?
There’s a lot of things that CFPB can do even if it doesn’t have Director. Most importantly it can enforce all of the consumer protection laws that existed before Dodd-Frank with respect to banks, thrifts, and credit unions with assets of $10 billion or more.
So what can’t it do without a Director?
Basically the new stuff that it was tasked to do. Most importantly without a Director it doesn’t have the power to deal with non-bank financial institutions. That covers a lot of ground including non-bank payments companies, money transmittal, payday lenders, student lenders, and non-bank mortgage service providers.
If the DC Circuit reasoning is affirmed by the Supreme Court what happens to things that the CFPB did during Cordray’s tenure?
I don’t think that’s very clear at the moment. And it is always possible that Congress could pass legislation that could fix any problems that arise — possibly as a compromise concerning the appointment of a Director or changes in the CFPB itself.
What about the President’s nomination of Cordray to the CFPB that happened last week — what’s likely to happen with that?
Well, this gives the Republicans that want to place some limitations on the CFPB some leverage.
What limitations are they seeking?
They want to replace the Director with a commission similar to the FTC so that there isn't a single individual in complete control. They also want Congress to be able to approve the CFPB's budget. Under the law the CFPB gets an amount equal to 10 percent of the Federal Reserve Board's total operating budget, which is outside of any Congressional approval process.
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