What would it mean for the Consumer Financial Protection Bureau – and its final mortgage rules – if a federal court were to deem the President's recess appointment of CFPB Director Richard Cordray unconstitutional?
As of Friday, that question started to have a tinge of real possibility to it after the U.S. Court of Appeals for the D.C. Circuit deemed President Obama's recess appointments to the National Labor Relations Board unconstitutional.
The problem for the CFPB is a similar case, challenging the President's recess appointment of Richard Cordray to the CFPB, is still pending.
Alan Kaplinsky, a partner with Ballard Spahr, listened to the White House deem the NLRB ruling as one that would not impact the CFPB, but Kaplinsky says "that's just spin." He believes the NRLB ruling could just as easily be applied to Cordray in the existing case challenging his recess appointment.
If Cordray were to lose authority, the fate of recent rulemaking efforts by the CFPB become "cloudy" at best, according to Kaplinsky.
Having Cordray lose his authority would roll the CFPB back to its infancy stages prior to Cordray's appointment in January 2012. In the pre-Cordray era, the agency operated under a senior leadership team with no official director and basic powers outlined in the Dodd-Frank Act, which created the bureau.
Since Cordray's appointment, key rules have been finalized and rolled out.
"It might certainly effect QM and some of the other rules in Dodd-Frank," Kaplinsky said. "That's the area where we do not have as much certainty as to how this is all going to play out," he added. "I think the most that can be said for now is that there is definitely some doubt as to whether all of these regulations are valid."
Of course, if the court rules differently in the CFPB case and finds Cordray's recess appointment constitutional, the CFPB will simply move forward.
But Friday's ruling in the NRLB case certainly made Cordray's current position seem less stable and subject to judicial scrutiny.
"We are still researching what the impact of a ruling would be on these final (mortgage) regulations," Kaplinsky told HousingWire. "I think some of them may be valid even under an acting director, and some of them may not be valid."
That question could turn on whether rulings, such as the final QM regulation and other guidelines issued under Cordray, could have been authorized under Dodd-Frank through the authority of the Federal Reserve Board or through HUD as part of RESPA, according to Kaplinsky.
"It really is a game changer," he added.
Kaplinsky said without Cordray, CFPB oversight of big banks is likely to stand up on its own under Dodd-Frank. But the CFPB's authority over certain nonbanks and payday lenders could be called into question.
Furthermore, Cordray losing authority would leave an opening for CFPB opponents to try and restructure the agency.
"Ultimately, what could happen is it may lead to a deal between the administration and Republicans to make some changes at the CFPB," Kaplinsky said.
Since he believes Republicans are unlikely to accept a Cordray appointment, they may try to change the leadership of the CFPB to a commission-type structure and use their bargaining power to make those changes, Kaplinsky explained.
Of course, this is all speculative until a decision is actually handed down in the specific case involving Cordray's appointment.