Posted on 2nd Feb 2012 @ 9:20 AM

It was bad enough when community banks were hit with the massive Dodd-Frank Wall Street Reform and Consumer Protection Act, even though it was not their activities that brought on the financial crisis. Now community banks face still more trouble in the form of months or even years of regulatory confusion and contention in the wake of Richard Cordray’s appointment to head the Consumer Financial Protection Bureau (CFPB).

President Obama used a recess appointment to get Cordray in office, justifying his action with a ringing defense of consumer’s rights and a blatant challenge to the 45 Republican Senators who had successfully blocked Cordray’s confirmation. While Cordray enjoyed the support of a majority of the Senate — usually enough to confirm a Presidential nominee — Republican Senators took advantage of Senate rules that effectively require a 60-vote supermajority for approval, a hurdle Cordray could not overcome.

In retaliation, the President has now granted Cordray a recess appointment — an option available when the Senate is not in session to receive a nomination — that would allow Cordray to serve without confirmation until the end of 2013. This assumes the Senate is actually in recess — a proposition Republican Senators vigorously challenge, as they are holding perfunctory meetings every three days to avoid creating the impression that the Senate has gone home.

The result is a super-powerful agency now under the personal command of a director who may or may not hold office legally. This is probably the best possible outcome for the two major political parties, both of which are already using the imbroglio to rally their respective supporters. It is also a glorious windfall for lawyers, who will be disputing every action the agency takes until the mess is ultimately tamed, probably by one or more Supreme Court rulings a long time from now.

The Stakes Are High

As the politicians jockey for position on the Cordray nomination, it is useful to recall what is at stake. The Senate Republicans had blocked the nomination in an effort to win what they thought were needed CFPB reforms. These included strengthening Congressional oversight, requiring Congressional appropriation of CFPB funds, strengthening financial regulators’ ability to block or modify CFPB regulations, and — crucially — replacing the single Director with a governing board.

Those proposals are in limbo now. The political fires are white-hot, and it is most unlikely any CFPB changes will be seriously considered, at least not until after the election.

Also, an isolated phrase in Dodd-Frank’s 800-plus pages is creating controversy. The phrase appears to require the CFPB Director to be confirmed by the Senate before extending his agency’s authority to nonbank institutions. If that reading is correct, the manner in which Cordray was nominated might bar him from taking action against the very wrongdoers President Obama named as most in need of oversight — the “payroll lenders, mortgage servicers, mortgage originators, private student lenders, and other firms that compete with banks but have largely escaped any meaningful federal oversight.”

Not everyone agrees that the phrase in question cannot be overcome by use of a recess appointment. It’s just another question — although a particularly important one — that is left dangling by the President’s choice of the recess appointment option.

The bottom line: It’s not clear whether the CFPB as currently operating can extend regulation to those who bankers would agree most need federal oversight. But community banks’ examiners will expect the institutions to obey all the CFPB rules, without waiting around to see if the CFPB and its operations are strictly legal.

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