Richard Cordray's recess appointment as head of the Consumer Financial Protection Bureau a year ago is being called into question after an appeals court ruling Friday invalidated President Obama's three recess appointments to the National Labor Relations Board.

A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled that Obama did not have the authority on Jan. 4 when he filled three recess appointments to the NLRB. On that same day last year, Obama appointed Cordray to the CFPB, even though the Senate was still in what is called a "pro forma" session.

Senate Republicans have fiercely opposed Cordray's appointment and on Friday Senate Minority Leader Mitch McConnell, R-Ky., said in a statement that the appeals court decision "now casts serious doubt on whether the President's 'recess' appointment of Richard Cordray to the Consumer Financial Protection Bureau… is constitutional."

The ruling sets the stage for yet another legal showdown — or a possible political deal — over the CFPB's fate and structure. The ruling also casts uncertainty over Cordray's role as the CFPB's director, since there will certainly be a legal challenge to his recess appointment. There are further concerns that if Cordray's recess appointment last year is invalidated, a slew of recent rules by the CFPB, including those affecting mortgage lenders, may be invalid as well.

At the time of the recess appointments, the Senate was away for the holidays on a 20-day recess and the White House called the pro forma sessions, during which the Senate meets roughly every three days for only a few minutes, a gimmick designed to prevent President Obama from exercising his constitutional authority.

The Justice Department issued a legal opinion at the time supporting the decision but acknowledged that it was likely to be challenged.

The NLRB suit was brought by Noel Canning, a Yakima, Wash., soft drink distributor that challenged an NLRB's decision that it had to enter into a collective bargaining agreement with a labor union

McConnell, 41 Senators and Miguel Estrada, a former assistant solicitor general, had filed an amicus brief last year in the case, challenging the constitutionality of the NLRB appointments. There is a separate case specifically challenging Cordray's appointment.

White House spokesman Jay Carney called the appeals court decision "novel and unprecedented," and said it contradicted more than 280 intra-session recess appointments made by both Republicans and Democrats since 1887. (The Obama administration is expected to appeal Friday's decision to the Supreme Court.)

"We strongly disagree with the decision… which contradicts 150 years of precedent," Carney said. He added, however, that "the decision had to do with one case, in one court that applies to one company. It doesn't apply to Richard Cordray."

The White House said there has been enormous frustration at the way nominations have been handled because Senate Republicans have tried to thwart the confirmation process by refusing to allow up or down votes, Carney said. He added that Cordray enjoys "broad support."

Estrada said that because Cordray was appointed at the same time as these NLRB board members, and during the same recess, "anyone challenging that appointment would only need to file suit in D.C. to have the appointment invalidated."

The appeals court ruling itself stated that: "Allowing the President to define the scope of his own appointments power would eviscerate the Constitution's separation of powers."

But Don Lampe, a partner with the Dykema law firm, urged against reaching any immediate conclusions.

"The judicial decision-making is not over," Lampe says. "Cordray's appointment wasn't challenged in this case so there is nothing automatic."

The NLRB ruling comes just one day after Obama renominated Cordray to the CFPB post. (Cordray's recess appointment expires at the end of this year.)

While the ruling is expected to influence the confirmation process, the White House is expected to seek a stay of the NLRB decision, which would halt any action until the Supreme Court could rule, he said.

A CFPB spokesperson said the bureau is not a party to the NLRB case.

"The court's ruling has no direct effect on the bureau," the spokesperson said.

Also at issue is whether the deluge of regulations and actions taken by the CFPB over the past year could potentially be invalidated.

Isaac Boltansky, an analyst at Compass Point Research & Trading, said in a research note that if Cordray's recess appointment were to be invalidated, the CFPB "would cease to have authority to supervise nonnbank industries," including payday lenders, mortgage servicers, debt collectors, credit reporting bureaus and private student lenders.

The CFPB's priorities would be "thrown into limbo," and the White House would have to find another path for his confirmation, Boltansky wrote in a research note.

"This ruling could represent a sizable speed bump for the CFPB," he wrote.

"This will provide an extraordinary basis for both consumers and the industry to challenge every single regulation," adds Richard Gottlieb, director of the law firm Dykema's financial industry group.

CFPB's enforcement and supervisory authority over large financial institutions was transferred from the Federal Reserve Board and therefore not be affected by this ruling.

But because of the way the Dodd-Frank Act was structured, the CFPB was given new authority to promulgate some regulations - over state-supervised mortgage servicers, payday lenders and non-bank lenders - only when the agency had a director in place.

Even if Cordray's recess appointment were to be invalidated it would not reverse the agency's actions, according to Lampe.

"There is legal precedent to the effect that actions taken by an administration agency, even though the director may not have been duly appointed, are not automatically reversed," Lampe says.

But David Rivkin, a partner at the law firm Baker Hostetler, said the NLRB ruling "virtually guarantees" that Cordray will not be reappointed. He called Cordray a "lame duck" who should resign immediately

"There is no difference between the NLRB appointments and Cordray's appointment," Rivkin says. "I would argue that all of the things that only a director can do basically have no legal force."


Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry