The Consumer Financial Protection Bureau, the centerpiece in the overhaul of financial regulations 18 months ago, was billed as a powerful new regulator to put the pocketbooks of average Americans ahead of the fat wallets on Wall Street.
But the agency has been hobbled since opening last summer because it couldn’t exercise some of its most important powers — such as new rules for mortgage brokers, payday lenders and financial firms outside the banking system — until the Senate confirmed its first director.
On Wednesday, President Obama broke through a Republican blockade on confirming any director by appointing Richard Cordray for the job during a Senate recess and giving the new agency its full authority.
The move was applauded by consumer advocates, who had been pushing the White House to take the muzzle off its new watchdog.
“Congress wanted the bureau to protect consumers no matter where they shopped for financial products,” said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. “With a director, the public can now have confidence the consumer bureau is ready, willing and able to investigate their financial problems.”
Senate Republicans were furious at what they called Obama’s unprecedented end run around the confirmation process, which they were using as leverage to try to weaken the consumer bureau’s authority.
“The precedent that would be set by this cavalier action would have a devastating effect on the checks and balances that are enshrined in our Constitution,” House Speaker John A. Boehner (R-Ohio) said.
The appointment probably will be challenged in court, if not right away then once the agency issues its first rules. And that casts some doubt over its clout as the government’s guardian for consumers in the financial marketplace.
“It puts a big cloud over the bureau,” said David Hirschmann of the U.S. Chamber of Commerce, one of the consumer bureau’s biggest opponents.
Hirschmann wouldn’t say if the chamber would sue, as it did in 2010 to invalidate a controversial Securities and Exchange Commission rule that made it easier for shareholders to force out company directors.
“If a court in the future finds [the Cordray appointment] was unconstitutional, it brings into question everything the agency does going forward,” Hirschmann said.
But until that point, the consumer bureau will have a leader to help it take off the training wheels.
Among the new powers is the ability to take action against financial companies selling products or engaging in practices deemed “unfair, deceptive or abusive.” Payday lenders, with their high interest rates, could be one of the first targets, said Edward Mills, a financial policy analyst at FBR Capital Markets & Co.
He noted that the stock of the only publicly traded payday lending company — Advance America, Cash Advance Centers Inc. — was down nearly 10% on Wednesday, losing 88 cents to $8.30.
Cordray’s appointment “turns the lights on at the agency,” Mills said. “All the attention now can focus on what they can do rather than who’s going to lead.”
Cordray served as Ohio attorney general from 2009 to 2010 and was one of the most aggressive state officials in investigating the banking and mortgage industries. After narrowly losing reelection, he was appointed as the consumer agency’s first enforcement director.
Obama nominated him to be director in July. Although 53 senators voted for his confirmation in December, Cordray fell short of the 60 votes needed to overcome a Republican filibuster.
Now that he’s avoided that hurdle, Cordray promised Wednesday that supervising mortgage servicers and other nonbank financial institutions would be a top priority.
“Many of these institutions had no regular federal oversight in the run-up to the financial crisis,” Cordray said in a post on the consumer agency’s blog. “They led a race to the bottom that pushed aside responsible businesses, including community banks and credit unions, and greatly harmed consumers.”
The bureau already had consumer protection authority over banks, which led some in the industry to complain they were at a disadvantage compared to unregulated nonbank competitors. But Frank Keating, head of the American Bankers Assn., wasn’t happy to have the field leveled Wednesday.
“It puts the bureau’s future actions in constitutional jeopardy, threatening its work, complicating compliance efforts of banks and further undermining the entity’s authority and credibility,” he said.
The Constitution gives the president the power to fill temporary vacancies when the Senate is not in session. But in recent decades, presidents — both Republicans and Democrats — have used this temporary appointment power to get around Senate opposition to nominees.
The drawback is that recess appointments, unless later confirmed, last only for up to two years. For Cordray, that would mean he could serve until the end of 2013 — far shorter than the position’s five-year term.
The Supreme Court has never ruled on what constitutes a recess. But some legal experts predicted that Obama would face a stiff court challenge because he made several recess appointments Wednesday during a short break in a Senate session.
“It’s a high-roller move,” said Washington lawyer John P. Elwood, a Bush administration veteran, because it is likely to trigger a legal challenge.
Elwood added, however, that administration lawyers from both parties have long argued the president has broad power to make recess appointments.
The Justice Department implied in a 1993 opinion that a recess of more than three days was needed before the president could exercise the power to appoint nominees without Senate confirmation, according to the nonpartisan Congressional Research Service.
No such appointments have been made during recesses of fewer than 10 days over the last two decades. In 1903, President Theodore Roosevelt made more than 160 recess appointments during a Senate break of less than a day.
To block some key Obama nominees, the Republican majority in the House has prevented Congress from technically recessing for more than three days at a time. During its holiday breaks in recent months, the Senate has been holding sessions lasting just a few minutes every third day, with only one or two members present.
Harvard Law professor Laurence H. Tribe called them “short, phony sessions” that do not mean the Senate is truly in session.
“He is on very solid constitutional ground,” said Tribe, a friend and supporter of Obama. Elwood agreed with Tribe that gaveling the Senate into session for a few minutes was a phony exercise, but said, “There is virtually no law in this area.”
In 2004, the full U.S. 11th Circuit Court of Appeals in Atlanta upheld President George W. Bush’s decision to appoint William H. Pryor to that court during an 11-day Senate recess. Pryor was later confirmed by the Senate.
“The Constitution, on its face, does not establish a minimum time that an authorized break … must last to give legal force to the president’s appointment power,” the appeals court said.
Republicans argued Wednesday that the Senate remains in session because it has not officially adjourned. The Supreme Court has said that members of Congress generally do not have legal standing to sue to challenge a law or government policy. But a business could file suit to challenge an agency decision that affects it.
“They could challenge it on the grounds the director who made the decision wasn’t validly appointed,” Elwood said.
Analysts expect the agency to move more aggressively than it has over the last six months under an acting director.
“Things have been proceeding very, very slowly,” said Joseph Lynyak, a financial services lawyer at Pillsbury Winthrop Shaw Pittman. “Now that the director has been appointed, those new powers arguably kick in, including the authority to issue a plethora of new regulations.”