by John White
On Jan. 4, 2012, while the Senate was in pro-forma session, President Obama announced that he had the power to declare the Senate in recess. He then made three "recess appointments" to the NLRB and appointed Richard Cordray to head the Consumer Financial Protection Bureau (CFPB).
In the first significant resistance to the concentration of presidential power, a three-judge panel of the U.S. Court of Appeals in Washington, D.C. disagreed. The court unanimously said that the president exceeded his constitutional power and that the Senate was not in recess. Further, the panel concluded that the Constitution allows recess appointments only during the once-yearly recess between sessions of Congress. The court ruled that Obama's recess appointments to the National Labor Relations Board are unconstitutional. Similar CFPB litigation is in the pipeline.
Reuters notes that "White House spokesman Jay Carney called the ruling 'novel and unprecedented' and said it contradicted 150 years of practice by both Democratic and Republican administrations." During his January 25 radio show, Mark Levin observed that Obama's seizing the power to determine when Congress is recessed is the truly unprecedented aspect of this case. Levin is also president of Landmark Legal Foundation, which filed briefs in the case.
The overreach by the president has invalidated a year's worth of NRLB rulings and orders. Resolving those illegal decisions will be disruptive, but this is nothing compared to the turmoil caused by the illegitimate appointment of Richard Cordray.
From its inception two years ago, the CFPB has been a complicated and unusual bureau. One of the more significant complications is the novel structure of the CFPB itself. The majority Democrats in Congress placed the CFPB inside the Federal Reserve in order to frustrate future changes by Republicans. In no other case has the Congress handed legislative power to a bureaucracy that is shielded from Congressional oversight. The result is that the CFPB became both highly politicized and beyond the control of Congress.
Diane Katz, a regulatory policy expert from the Heritage Foundation, a conservative think tank, called the CFPB "one of the most powerful - and unaccountable - federal agencies ever created" in this week's edition of Heritage's Backgrounder publication.
"Basically, Cordray has a free hand," Katz told ABC News before the announcement Thursday. "He is not answerable to Congress in terms of the agency's budget being independent; he doesn't answer to the white house directly; nor does the Federal Reserve have much authority to intervene in bureau affairs."
Previous to the January 4 appointments, the administration was already exploiting the limits of the statute language by selecting Elizabeth Warren as the White House "Consumer Czar." Warren's task was to create the CFPB without the advice and consent of the Senate. The Washington Post reported:
President Obama announced the appointment Friday of Harvard law professor Elizabeth Warren to be an assistant to the president and oversee the creation of a new consumer financial protection bureau.
Speaking at the Rose Garden, Obama called Warren "one of the country's fiercest advocates for the middle class" and said she will "oversee all aspects of the bureau's creation" and "play a pivotal role" in picking her successor.
The decision to name Warren, the first to call for the creation of such a bureau, to the temporary job has been widely seen as a compromise aimed at avoiding a potentially bruising Senate confirmation.
Although Warren's potential nomination as director was controversial even among some Senate Democrats, as White House "Consumer Czar," Warren was unrestrained by Senate input while she created the new CFPB. Operational activation of the agency required Senate confirmation of a director.
When he made the Cordray recess appointment, activating the CFPB without Senate confirmation, President Obama was pushing the very limits of the CFPB statutory language. Even prior to the president's unilateral action, senators were already raising questions. The day President Obama made the unconstitutional appointments Human Events noted:
"The irony is that while this recess appointment may advance the White House's political goals, it does nothing to advance the work of the CFPB," said Sen. Robert J. Portman (R.-Ohio), who represents Cordray's home state and has reached out to the White House to resolve his stalled confirmation.
"The statute creating the CFPB makes clear that only Senate confirmation of a director - not a recess appointment - can activate the new powers of this agency to regulate consumer transactions with Main Street businesses," he said.
"Portman seems to be right on the money, he is right to zero in on what the letter of the law is," said John Berlau, the director of the Center for Investors and Entrepreneurs at the Washington-based Competitive Enterprise Institute.
"The unconstitutional process for this appointment compounds the constitutional defects in the agency," he said. "Obama's appointment of Cordray may have been too clever by half."
With the likelihood that Cordray's recess appointment is also unconstitutional, the status of the agency is murky at best. First, an unconfirmed czar built the agency. Then the agency began operations and started rulings with an unconfirmed director. If the court also rules that Cordray was unconstitutionally appointed director, the CFPB will have been activated without ever having had a director. Just what parts of this agency are valid, if any? Answering that question may require extensive litigation.
The activities of the CFPB have been substantial in the last year. According to ABC News, "[u]nder Cordray's lead, the CFPB has refunded $425 million to consumers from big-name credit card companies, including American Express, Capitol One [sic] and Discover." Given the regulatory complexities and the question of the legal validity of the agency, the air badly needs to be cleared.
Going forward, the administration has two options. First, the administration may comply with the court's order and remove the unconstitutional appointees. Alternatively, they may appeal the decision to the Supreme Court.
Labor law attorneys Bill Trumpeter and Chris Parker observed:
The NLRB's response to this decision has been to say that it disagrees with the D.C. Circuit, that the "no quorum" finding applies only to the unfair labor practices case that was before the Court in Noel Canning, and that it plans to continue on as if the decision never happened.
At least for now, the administration has chosen Option 3: the NLRB intends to ignore the court and continue business as usual.
At the CFPB, ABC News reports, "[f]our days into his second term, President Obama renewed a fight from his first term when he renominated Richard Cordray for head of the Consumer Financial Protection Bureau."
Given the legal questions and litigation surrounding the bureau, Senate confirmation of Cordray or any other director would only compound the problems with the agency. The Senate might be well advised to consider the outcome of litigation prior to becoming embroiled in the turmoil.
The CFPB has been an ongoing political lightning rod, resulting from its clash with the Constitution and other federal policy. Two different news articles illustrate that clash. First, Investors Business Daily discusses the Community Reinvestment Act.
A recent study by the National Bureau of Economic Research, the nation's pre-eminent economic research group, states that the CRA "clearly" had a major impact on the flood of subprime loans made in the late 1990s and 2000s, which directly led to the housing crisis.
By quietly expanding the regulation, analysts say President Obama is picking up where President Clinton left off in April 1995, when he rewrote rules for what had been a largely toothless law as first drafted in 1977.
The new rules for the first time mandated that banks use "innovative" or "flexible underwriting practices." Compliance required banks to pass a heavily weighted "lending test" or suffer holds on expansion plans.
The CRA overhaul "has been a disaster," said ex-BB&T CEO John Allison in his recent book on the financial crisis. He argued it's forced "banks to participate in making high-risk housing loans to low-income buyers who would not meet traditional bank lending standards."
Still, the Obama administration wants banks to step up approval of such low-income mortgages. And it's using the CRA to spur more lending[.]
In other words, the CRA requires banks to make new risky loans to low-income buyers. Meanwhile, the CFPB has a different set of goals:
The Consumer Financial Protection Bureau (CFPB) announced its new rule to protect home borrowers from irresponsible mortgage lending by requiring lenders to ensure prospective home buyers have the ability-to-repay their mortgage. Home Destination, a Minneapolis Realtor with RE/MAX Results, comments on how home buyers benefit from the rule.
Home Destination's owner Jenna Thuening puts it simply: "The CFPB released mortgage standards aim to help stop home foreclosures due to the type of risky lending that caused the housing market crisis. "The rule defining a 'qualified mortgage' really means one a borrower can actually be expected to pay back, while eliminating questionable loans that stretched homeowners to the capacity that many faced foreclosure and couldn't stay in their homes."
Clearly, the CFPB is writing rules that prohibit the very type of risky home loans that the CRA is promoting. Isn't it interesting that the CFPB's "risky loans" are the CRA's "innovative" and "flexible underwriting practices"?
When faced by conflicting and mutually exclusive regulations, banks will be forced to abandon home mortgage lending -- a typical result when the right hand of government doesn't know what the left is doing.
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