WASHINGTON — A ruling by a federal appeals court last week that President Obama acted improperly in recess appointing members of the National Labor Relations Board may encourage Democrats to cut a deal on the structure of the Consumer Financial Protection Bureau.
Senate Republicans have refused to consider any nominee to head the CFPB for the past two years unless several changes are made, including replacing the single director with a five-member commission and subjecting it to the congressional appropriations process.
But the Obama administration has resisted those changes, arguing the issue was already decided by the Dodd-Frank Act that created the consumer agency. Instead, President Obama recess appointed Richard Cordray last year to head the bureau, a move that many GOP lawmakers derided as unconstitutional.
The ruling by the U.S. Court of Appeals for the D.C. Circuit, which said the recess appointments to the NLRB were unconstitutional, has bolstered the GOP's position, as those appointments were done at the same time as Cordray's selection. Although the White House is expected to appeal the ruling to the Supreme Court, that fight could drag out for months or longer.
Some observers said it would be quicker and easier to cut a deal with Republicans when it comes to the CFPB.
"It's really inevitable that Obama is going to have to deal with the Republicans. He's going to have to make a deal and act quickly," said Alan Kaplinsky, a partner with Ballard Spahr. "The Republicans want a commission and I think that's where ultimately there will be a five-person commission, and maybe Cordray will be one of the members or even the chair, and then the other big battle will be over funding because the CFPB is not subject to the congressional appropriations process."
Cutting a deal at least gives CFPB legal certainty surrounding any rulemakings and enforcement actions it has taken to date — a key issue should a legal case against the agency proceed.
"The administration can't want the rules of the road to be totally uncertain for the year it could take for this to go to the Supreme Court," said Andrew J. Pincus, a partner with Mayer Brown who represents the U.S. Chamber of Commerce.
House Financial Services Committee Chairman Jeb Hensarling said Friday that the court ruling should push the Obama administration to cut a deal.
"This ruling makes clear that the President's alleged recess appointment of the CFPB director is unlawful or unconstitutional or both. It also clearly calls into question the legal validity of any and all actions undertaken by the CFPB since this appointment was made, adding even greater uncertainty to our still struggling economy," Hensarling said in a statement. "Congress and the Administration should take this opportunity to make common sense reforms to the CFPB so it is transparent and accountable to the American people. At a bare minimum, the CFPB should be governed by a bipartisan commission — which is how other federal agencies charged with consumer or investor protection operate."
Observers agree that the most likely deal would be to replace the agency's single director with a five-member commission. Democrats are far less likely to agree, however, to require the CFPB to submit to the appropriations process, something that is not required of the other banking regulators.
Yet some said the Democrats may hold out on any deal. Technically speaking, the NLRB ruling did not directly affect Cordray, and it would likely take significant time for a legal challenge against the agency to proceed.
"The CFPB was not a party to the NLRB case. So while the NLRB case creates a very unfavorable precedent for the CFPB, there's no jurisdiction and no specific finding that Richard Cordray was inappropriately appointed," said Thomas Vartanian, a partner at Dechert.
Ronald Glancz, a partner at Venable Baetjer Howard & Civiletti, agreed, especially given the president's renomination of Cordray last week shortly before the appeals court ruling.
"Bottom line is I don't think it's going to have any impact immediately," Glancz said. "One, because there's a nomination pending, but I think in the long term obviously if the court doesn't overrule this decision it'll have a fairly large impact."
So far, the only lawsuit with relevance to the CFPB is one from a small Texas bank, which is challenging the constitutionality of the Dodd-Frank law and Cordray's appointment. The decision in the NLRB's case could provide that bank with a legal reinforcement to it argument.
Still, that could take years to resolve. In the meantime, the bigger question will be applicability of the laws that the CFPB has drafted under Cordray.
"If there's a cloud over the applicability and validity of these regulations, because there's a cloud over the appointment of Richard Cordray, that uncertainty has got to be resolved quickly for the benefit of the people that these regulations apply to," Vartanian said. "And then the big question is what does the agency do tomorrow if a new regulation comes before Richard Cordray for approval?"
Mark Calabria, director of financial regulation studies at the Cato Institute and a former GOP Senate aide, agreed the ruling strengthened the Republicans' hand. Yet he said Democrats are in no mood to seek a deal.
"I don't see the president withdrawing Cordray, and I don't see them doing anything but continuing to take this on a fight," Calabria said. "The president has done a very good job on the issue, painting Republicans as anti-consumer, and I don't think Republicans have done a very good job at responding to that criticism. If there's a shift to where the public sees this issue as about the Constitution and executive power, then I think that starts playing against the president. But I don't think we're there yet."
Calabria said that any deal is likely to come from Senate Democrats rather the Obama administration, adding that any negotiations over the structure of the agency are at least six months or a year away. Getting Democrats to agree to structural changes would also be dependent on a number of factors, including future court decisions affecting the CFPB and its rules and an inability to get the votes needed to nominate a director.
"It's going to have to be something that comes out of the Senate, out of frustration that the agency has been stymied," Calabria said. "Right now there's no interest in dealing because they have somebody in there and have been able to do what they want."
Brandon Barford, a vice president at ACG Analytics, said the odds of a deal in the near term were pretty low.
"I don't really see anything short of losing control in the Senate that would make Democrats change their minds on this issue," Barford said. "The White House doesn't want to be seen as succumbing to pressure from Republicans or the financial services community."
Senate Banking Committee Chairman Tim Johnson appeared far from signaling a compromise on Monday, instead criticizing Republicans for continuing to hold up Cordray's nomination.
"As I have said in the past, the courts are going to have to decide this matter, and I expect that the administration will appeal the D.C. Circuit decision," Johnson said in a statement. "However, it shouldn't have had to come to this. President Obama nominated a fair, intelligent and well-qualified nominee in Richard Cordray, and he deserved an up or down vote in the Senate — and still does. Director Cordray has done a superb job at the CFPB taking a balanced approach. The marketplace needs certainty and there is no legitimate reason to block his nomination. The Senate should confirm Richard Cordray without delay."
Supporters of the CFPB may also fear that opening up the debate on structural changes to the agency could lead to pushes for other modifications to the Dodd-Frank reform law. Analysts have said that similar concerns are already delaying passage of a broader technical corrections bill, for fear the discussion would move toward re-litigating major substantive aspects of the law.
"Democrats are not going to engage in a debate if the club in the closet is total repeal of Dodd-Frank. Why should they do that? Perhaps if they could confine the discussion to those two structural issues," said Cornelius Hurley, director of Boston University's Center for Finance, Law & Policy. "CFPB is starting to do significant things. The more the impact of those things is considerable, the stronger the case that can be made that it be a commission or a board rather than one person. But the merits of that get lost in the bombast of total repeal of Dodd-Frank."
The White House may ultimately have no choice but to deal, however, as relying on the Supreme Court could prove to be a dubious proposition.
In its opinion, the appeals court did not answer the basic question: who decides if the Senate is in session, the upper chamber or the president? But it'll be one of three critical questions that the White House will need to answer when it seeks to appeal the court's decision at the Supreme Court.
The appeals court ruled on two issues: intra-session vs. inter-session and establishing a narrow definition of recess. White House spokesman Jay Carney said the decision by the court "contradicts "150 years of practice by Democratic and Republican administrations." There have been more than 280 intra-session recess appointments since 1867. Compared to President Bill Clinton and President George H.W. Bush, who have more than a 100 recess appointments each, Obama has only made 39.
But in order for the White House to win before the Supreme Court, they will have to win on all counts; just losing one argument will increase the likelihood of the high court to uphold the District Court's ruling.
"The White House has to win on three different grounds so they have three mountains to climb," said Margaret Tahyar, a partner at Davis Polk and Wardwell. "When the White House comes out and says this has been going on for 150 years, they are only talking about the smallest of the three mountains."