The U.S. Supreme Court agreed on Monday to hear challenges concerning the legality of recess appointments made by President Obama early last year.

The case, National Labor Relations Board (NLRB) v. Noel Canning, concerns the recess appointments of three NLRB board members and not the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB). Still, there are possible ramifications to the CFPB depending on the ruling.

Ironically, however, any decision likely won't affect Cordray directly. His appointment will expire at yearend, while the Supreme Court is unlikely to issue a ruling until 2014.

But even with Cordray gone, the ruling is almost certain to affect parts of the mortgage rules and other regulations promulgated during his time in office, potentially invalidating their applicability to nonbanks such as collection agencies and payday lenders.

"There's a lot riding on the U.S. Supreme Court case," said Jim Martin, a partner at Reed Smith Martin. "It's going to be a mess if those recess appointments are invalidated."

At issue are the CFPB's legal powers under the Dodd-Frank Act. The 2010 financial reform law created the agency and said it inherited existing regulatory authority to write new rules that cover all banks. The law also gave the CFPB authority to regulate nonbanks, but in a drafting error, it said the nonbank authorities were not valid until a Senate-confirmed director of the agency was in place.

Cordray was nominated in July 2011 and Senate Republicans blocked a confirmation vote for several months while trying to bring more Congressional oversight to the structure of the agency.

Obama then used his recess appointment authority to install Cordray – and the NLRB board members — in early January 2012. Congressional Republicans have argued they were not in recess and that they had a plan to call pro forma sessions of Congress every third day with the purpose of blocking Cordray's appointment.

The Obama administration has argued that its recess appointment of Cordray in January of last year meets the Dodd-Frank law's requirements and the agency has promulgated rules since then as if they apply equally to banks and nonbanks.

But if the Supreme Court invalidates the NLRB appointments, a legal challenge to Cordray's appointment is likely to quickly follow. Assuming that challenge is also successful given the fact that it parallels the NLRB decision, any rules released by CFPB may no longer apply to nonbanks. It also would no longer have authority to examine or take enforcement actions against nonbanks.

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