“All things are subject to interpretation whichever interpretation prevails at a given time is a function of power and not truth.” Friedrich Nietzsche
In 1933 President Roosevelt established the NRA (National Recovery Administration) as part of his “100 days” to get the U.S. out of the depression. Its symbol was a blue eagle. It had vast powers over business, markets and labor. Among other things it instituted a system of industrial codes for key industries and labor, farmers and businesses. It attempted to abolish child labor, instituted minimum wages in coded industries. It promoted a system of price stabilization which effectively leads to cartels and price fixing. It had approximately 5000 business practices that were prohibited and administrative orders numbering over 3000. In 1935 the U.S. Supreme Court declared the NRA unconstitutional, in a case involving a chicken farmer, Schechter Poultry Corp. v. U.S. Some referred to the holding as “the sick chicken killed the blue eagle.”
Has the Consumer Financial Protection Bureau (“CFPB”) inherited the NRA mantle of the “most powerful agency in government”? With the I.R.S. hobbled by scandal, arguably the CFPB is the most powerful agency in the U.S. government. Some key factors support this view: (1) it is not subject to budget control or oversight by the Congress, and is financed by having access up to 12% of the Federal Reserve Board’s total operating budget; (2) its rulings and regulations are not subject to any monitoring and can only be overturned by a vote of 2/3 of the members of the Financial Stability Oversight Council and only if the CFPB’s actions would put the “safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.”; and (3) its director has a five year term and can only be removed by the President “for cause”. The Financial Stability Oversight Council is made up of the Secretary of Treasury and most regulatory agencies of the federal government, 10 in number, including the Director of the CFPB.
With extremely limited exceptions, most of the consumer financial functions of the Federal Reserve, OCC, OTS [gone now], FDIC and NCUA were transferred to the CFPB. Neither the Federal Reserve nor any listed agency can overrule the CFPB. Because of CFPB’s jurisdiction over the alphabet soup of consumer law (RESPA, SAFE Act, Truth in Lending, etc.) CFPB has issued more than 25 guidance and regulation documents and more are coming almost every day. Mortgages and mortgage servicing are under CFPB’s jurisdiction and news comes out almost every day on some new development or exemption. CFPB does not have direct or supervisory jurisdiction over banks or credit unions that are smaller than $10 billion in assets. However, the responsible regulator (usually FDIC) must coordinate with the Bureau and may recommend action if there are material violations of consumer laws. CFPB can also use its regulatory and supervisory authority over “covered persons”, which do not have to be financial services. For example, in the last few days the CFPB asserted jurisdiction over AIG, the large insurance giant, on the basis that it was a key player in the economy and engaged in consumer services. CFPB has also drawn a bead on credit reporting agencies and issued a report on private student loans.
Most New Mexico banks and credit unions will have immediate and direct contact with CFPB in the mortgage industry. A bank or credit union mortgage compliance officer who does not subscribe to the CFPB periodic internet releases is risking his or her institution’s regulatory well-being. The Bureau’s Supervision and Examination Manual is also available on line at the Bureau’s website.
Is there a “sick chicken” on the horizon? A Texas bank, the Competitive Enterprise Institute (“CEI”) and others filed suit against CFPB, the Treasury Department, and the Director of CFPB and others claiming that the CFPB and its enabling legislation in Dodd-Frank was unconstitutional. The suit is pending in in federal court in the District of Columbia. The Director, Richard Cordray, was alleged to have been fraudulently appointed and various constitutional grounds were alleged as the basis for declaring the Bureau and its founding legislation invalid. The case is in the judicial process and there is no guidance as to its likely outcome.
If Richard Cordray is not confirmed by the Senate the CFPB may face other problems. Recently the D.C. Circuit Court of Appeals held that President Obama’s recess appointments of three N.L.R.B. commissioners were invalid. The Third Circuit Court of Appeals has just joined in a similar ruling. Since N.L.R.B. rules and decisions are by a vote of the commissioners, the recess appointment threatens to invalidate most the Board’s actions over the last years. President Obama used the same recess appointment procedure when Richard Cordray was appointed as Director of CFPB. It appears that Cordray’s appointment is similarly in jeopardy if he is not confirmed by the Senate—and Republicans have threatened filibuster. CFPB’s regulations to date are probably not at risk, since CFPB does not act as a board like N.L.R.B. However, there is serious doubt if the Bureau can continue it regulatory avalanche without a director.
And so the beat goes on.
Do Good
Marshall G. Martin
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