A cloud of uncertainty hovers over Washington's newest consumer watchdog agency.
A federal appeals court decision last week cast doubt on the validity of President Barack Obama's recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau, and raised questions about the legality of a year's worth of regulations and enforcement actions by the agency that have had far-reaching effects on consumers and the financial industry.
Although the financial industry initially was wary of the bureau, the confusion surrounding its leadership and authority now has bankers alarmed.
"From the perspective of certainty in the markets, the worst thing that can happen is to have these rules be determined to be not legal," said Dave Stevens, chief executive officer of the Mortgage Bankers Association. "It would be regulatory chaos."
Created by the 2010 Dodd-Frank Act, the bureau has oversight and regulatory powers over mortgages, credit reporting, debt collection and payday loans, among other consumer financial products and services. It has a budget of $448 million from the Federal Reserve and a staff of about 1,000.
Obama appointed Cordray director in January 2012 during a congressional break - called a recess - over Republican objections and as a way to circumvent a Senate impasse on his chosen appointee. Such so-called recess appointments have been used by presidents of both parties.
The U.S. Court of Appeals for the D.C. Circuit on Friday nullified Obama's three appointments to the National Labor Relations Board last January. The three-judge panel determined that the president can only make a recess appointment if the Senate is formally adjourned between sessions of Congress and only if the job became vacant during that same recess.
The president announced Cordray's appointment the same day as those for the labor board.
A spokesperson for the consumer bureau said the agency was not a party in the case decided Friday, and that the court's ruling has no direct effect on the bureau. But legal experts say the precedent casts a dark shadow over the legitimacy of Cordray's appointment and the bureau's work.
"The way Dodd-Frank was written to stand up the bureau, it requires a confirmed head in order to take certain of its actions, so I would think it would be highly questionable whether it has a confirmed head at the moment," said Chris Schroeder, a professor of law and public policy studies at Duke University School of Law.
The Justice Department is expected to appeal the case to the full circuit and the Supreme Court, but the matter likely won't get resolved this year.
A similar lawsuit that directly challenges the constitutionality of Cordray's appointment - and the bureau's very existence - is pending in U.S. District Court in Washington, D.C. A ruling in that case is expected by this summer.
In the meantime, banks, consumer advocates and attorneys are scrambling to determine the legal implications. The concern is that if Cordray's appointment is struck down, the rules issued by the bureau under his leadership also might be considered invalid.
For consumers, those rules include protections from predatory lending practices and unfair foreclosures.
An obscure legal doctrine holds that even if an official was improperly appointed, the actions that the official undertook while in office can't be overturned after the fact. But it's unclear whether the court would apply that doctrine in this case, said Schroeder.
"It's a very tenuous situation," said Richard Hunt, president and chief executive officer of Consumer Bankers Association, a retail banking group. "We've talked to 10 very smart attorneys in this town in the last 72 hours and we received 15 different opinions."
Hunt's organization is encouraging member banks to comply with the rules as if they're set in stone.
"We can handle bad news in the marketplace," Hunt said. "What we don't like is uncertainty, because in the end the consumer loses every day of the week. You can't have rules changing every day. You can't have rules that are retroactively invalid. You can't have rules that one day are valid and the next day they're not."
One of the most important rules finalized by the bureau recently was a long-awaited "qualified mortgage" definition designed to protect consumers from the type of irresponsible lending practices that led to the 2008 financial crisis.
The rule requires all mortgages to comply with basic requirements that ensure borrowers don't take on loans they can't afford to repay. Other rules finalized in the past year include protections for struggling homeowners facing foreclosure, a ban on incentives to sell unsafe loans to consumers, and a requirement for mortgage lenders to provide applicants with free copies of appraisals and other home-value estimates.
Since opening its doors in July 2011, the agency has received more than 133,000 consumer complaints about credit cards, bank accounts, mortgages and other consumer loans. Its first three major enforcement actions against Capital One Bank, Discover and American Express have resulted in a total of $435 million in refunds for nearly 6 million customers, in addition to $101 million in penalty fees.
Earlier this month, Obama re-nominated Cordray as the bureau's director. The confirmation battle won't get any easier the second time around. Republican senators have said they won't consider confirming anyone for the post until the bureau's powers are redefined. Some have proposed legislation that would subject the bureau to congressional budget approval and oversight and change its governance structure from a single directorship to a commission or board of directors.
Consumer advocates are urging the White House to stand firm to protect the bureau's independence and authority.
"If it's working, why fix it?" said Ira Rheingold, executive director of the National Association of Consumer Advocates. "I'm hoping the administration will say, 'We have a good director, we have an agency that's stood up remarkably quickly, that's doing good work, and we will defend it to its core.' "
For now, work at the bureau continues, despite the precarious legal situation.
"Everyone showed up for work yesterday and people are still going to get paid and the agency is still going to do what it's going to do. And unless and until the court rules otherwise that's going to continue," said Deepak Gupta, former senior counsel at the bureau.
"Nobody reasonable wants the bureau to become defunct or to completely lose its regulatory authority," Gupta said. "That would just create a Wild West atmosphere in the financial markets that nobody wants."
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