Plenty, judging from the January 25 decision—Noel Canning v. NLRB—issued by the U.S. Court of Appeals for the District of Columbia Circuit. The court ruled that President Obama’s recess appointment of three members to the NLRB was invalid and, as a result, the NLRB’s decision in the underlying dispute must be vacated because the NLRB lacked a quorum when it issued the order.

The CFPB comes into play because on the same day President Obama used the recess appointment for the three NLRB members, he also used the recess appointment to make Richard Cordray the first director of the CFPB.

A Little Background

Modern-day presidents have routinely used the Constitution’s Recess Appointment clause to avoid Congressional inaction on appointments requiring the advice and consent of the Senate.

However, back in President George Bush’s second term, Democrats came up with the idea of staging pro forma sessions of the Senate every three days to prevent presidential recess appointments. No recess, no recess appointments, right? The Bush administration thought the maneuver was a sham, but it didn’t fight it. Score one for the Dems.

But what’s good for the goose is good for the gander, so Republicans began using the same tactic to block Obama appointments—only this time, the Obama administration decided not to fight it. The Obama White House argued the Senate couldn’t limit the executive branch’s recess appointment authority by having one senator come to the Senate floor every three days and do nothing but bang the gavel.

So, on January 4, 2012, President Obama appointed three NLRB members (and one CFPB director), notwithstanding the fact that the Senate was operating pursuant to a unanimous consent agreement that provided the Senate would meet in pro forma sessions every three business days from December 20, 2011, through January 23, 2012.

Court Ruling Raises Issues for CFPB

All of which brings us back to Noel Canning v. NLRB. The circuit court held that “the Recess” in the Constitution’s Recess Appointments Clause is limited to intersession recesses.

As the court explained, “An interpretation of ‘the Recess’ that permits the President to decide when the Senate is in recess would demolish the checks and balances inherent in the advice-and-consent requirement, giving the President free rein to appoint his desired nominees at any time he pleases, whether that time be a weekend, lunch, or even when the Senate is in session and he is merely displeased with its inaction. This cannot be the law. The intersession [as opposed to the intrasession&91; interpretation of ‘the Recess’ is the only one faithful to the Constitution’s text, structure, and history.

The court went further. It also held that the President may only make recess appointments to fill vacancies that arise during the recess and that the President must make the recess appointment during the same intersession recess when the vacancy for that office arose.

White House Press Secretary Jay Carney called the court’s decision “novel and unprecedented,” adding it “contradicts 150 years of practice by Democratic and Republican administrations.” The Obama administration is widely expected to appeal the ruling to the Supreme Court.

But Republicans were quick to pounce. Senate Minority Leader Mitch McConnell (R-KY) said the court’s decision “casts serious doubt on whether the President’s ‘recess’ appointment of Richard Cordray to the Consumer Financial Protection Bureau… is constitutional.”

Financial Services Committee Chairman Jeb Hensarling (R-TX) went even further. “This ruling makes clear that the President’s alleged recess appointment of the CFPB director is unlawful or unconstitutional or both,” Rep. Hensarling declared. “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 is likely overreaching in his “any and all” statement. But it’s a good bet that if Cordray’s nomination is ultimately found to be invalid, the ongoing implementation of the Dodd-Frank Act is about to get even more chaotic.

Note: The day before the court’s ruling, President Obama announced his intention to re-nominate Cordray as CFPB director, this time for a five-year term. Cordray’s recess appointment was set to end at the end of 2013.

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But January 2013 will be remembered, in banking circles at least, for the Consumer Financial Protection Bureau’s regulatory blizzard of Dodd-Frank mortgage rules. In an effort to meet a January 21 Dodd-Frank deadline, the CFPB dumped seven final rules on banks and other lenders, all in the mortgage lending area.

Here’s a quick recap. On January 10, the Bureau adopted Reg. Z ability-to-repay (ATR) and qualified-mortgage (QM) standards. It amended the Reg. Z escrow requirements for higher-priced mortgage loans. And it amended both Regs Z and X (RESPA) to strengthen consumer protections for high-cost mortgage (HCM) loans and provide consumers with information about homeownership counseling.

On January 17, the Bureau revised Regs Z and X again, this time to implement extensive new mortgage servicing rules mandated by Dodd-Frank. A day later, on Jan. 18, the CFPB (along with five other agencies) amended the appraisal rules for higher-priced mortgage loans. That same day, the Bureau amended Reg. B (ECOA) to implement Dodd-Frank’s appraisal requirements for higher-priced mortgage loans.

Two days later, on January 20, the CFPB topped off the regulatory storm with a Reg. Z amendment to implement Dodd-Frank changes to the ground rules for loan originator compensation. (Note: We take a closer look at the last two developments below.)

Of course, that’s far from the end of the stormy weather churned up by the mortgage requirements in Title XIV of Dodd-Frank. On top of these January 2013 developments, the CFPB expects to finish its super-sized TILA/RESPA disclosure integration in September 2013. Moreover, since most of the 2013 final mortgage rules have January 2014 effective dates, mortgage market participants should get ready for a second regulatory blizzard next year when the real compliance storm hits home.

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To protect mortgage borrowers from “surprises and runarounds by servicers”—and to implement the Dodd-Frank Act’s servicing provisions—the CFPB adopted two final rules: a 753-page Regulation X notice and a 426-page Regulation Z notice.

That’s on top of last week’s regulatory page count, which included the CFPB’s 804-page Ability to Repay final rule, its 116-page Escrow Requirements final rule, its 431-page final rule on High Cost Mortgages and Homeownership Counseling Amendments, and its 185-page proposed rule on Amendments to the Ability to Repay Standards.
Check our math, but that looks like a 2,715-page regulatory tsunami in just a week. What goes around comes around.

The X and Z amendments cover nine major topics: (1) periodic billing statements; (2) interest-rate adjustment notices for ARMs; (3) prompt payment crediting and payoff statements; (4) force-placed insurance; (5) error resolution and information requests; (6) general servicing policies, procedures, and requirements; (7) early intervention with delinquent borrowers; (8) continuity of contact with delinquent borrowers; and (9) loss mitigation procedures.

Small Servicer Exemption

The good news in all this, at least if you’re a small banker, is that the final rules exempt servicers that service 5,000 or fewer mortgage loans from parts of the new requirements. (The Independent Community Bankers of America had advocated a servicing threshold of at least 10,000 mortgages.)

The ICBA pointed out in a press release that the CFPB exempted small servicers from “rules requiring servicers to create and maintain new general servicing policies and procedures, to issue monthly statements that would include considerably more information than most community banks already provide, to avoid charging for ‘force-placed’ insurance, and to follow specified loss-mitigation procedures for mortgage loans secured by a borrower’s principal residence, among other guidelines.” Most community banks, ICBA said, are already in compliance with these new rules.

“Nevertheless, community banks will have to comply with interest-rate adjustment notices for adjustable-rate mortgages,” ICBA said.

It added that it is “particularly concerned that servicers will be required to deliver the notices between 210 and 240 days prior to the first payment due after the first rate adjustment. They also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change. These requirements will be costly for the community banking industry as well as consumers and could pose compliance challenges.”

The American Bankers Association said it recognizes the need for regulatory reform of certain mortgage servicing practices and agrees that consumers need to be well informed about the terms of their mortgage loans. It added, however, that it is “concerned that some of the CFPB’s new requirements are not expressly mandated by Dodd-Frank and could lead to further consolidation in the servicing industry, increasing the cost of credit and harming borrowers.”

Easy Transition?

The CFPB said it hopes to ensure “an easy transition to implementation.” It noted that the new rules don’t take effect until January 10, 2014, and that, to help with compliance, it will be issuing plain language implementation guides and other materials to help servicers understand supervisory expectations.

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“So the rules we are finishing work on now are not likely to change much as a result of anything Congress might do,” Curry said, adding that regulators “are nearing the finish line” on the Volcker and risk-retention rules.

Although federal regulatory agencies will be spending a good deal of time on these and other policy initiatives, Curry said the bulk of regulators’ efforts “will be directed toward supervision—ensuring that banks and thrifts are safe and sound and able to meet the needs of their customers.”

The OCC will be focusing on a number of significant risks in the coming months. Curry highlighted three “broad themes” discussed in the OCC’s recent “Semiannual Risk Perspective,” which, he added, provides some insight into what examiners will be focused on in the year to come.

At the top of the list: the potential for banks and thrifts to take on inappropriate levels of risk as they search for ways to remain profitable in a difficult economic environment.

“The tendency for some financial institutions to take on too much risk in the search for profits isn’t a new story,” Curry said. “It’s one we’ve seen replayed a number of times, in both good times and bad. But this downturn has been especially difficult and long-lived, and the temptation for financial institutions to stretch too far in the search for earnings will be particularly great. So examiners will of necessity pay close attention when they see the institutions we supervise loosen underwriting standards or move into unfamiliar product lines or geographic areas.”

He added, “Right now, we see slippage in underwriting standards, especially with respect to leveraged lending and commercial and industrial loans. We also see signs that too many institutions are allowing their loan loss reserves to run down, which is particularly troubling in light of the uncertain macro economic environment as well as the direction underwriting of some commercial credit is taking.”

The second area the OCC will focus on is the challenge to revenue growth from both the slow economy and heightened financial market volatility.

“Low rates, which are generally expected to persist over the near term, will continue to pressure net interest margins as older assets mature or default and are replaced with lower-yielding instruments,” Curry said. “At the same time however, there is little if any room for the rates on your deposits and liabilities to go lower to offset declining asset yields. When interest rates begin to rise, funding costs could ramp up faster than in the past, eating into any revenue gains from rising asset yields.”

The third area of concern involves the aftereffects of the housing market bust. Although regulators are starting to see signs of improvement in commercial real estate and stabilization in the housing sector, Curry noted that problem assets remain high by historical standards and CRE portfolios are vulnerable to any new economic stresses.

Despite these risks, Curry ended on an upbeat note: “I know this perspective on risks facing the industry sounds a bit daunting, but as we put the financial crisis one more year further into our past, it’s important that all of us—supervisors and financial institutions alike—address risks to safety and soundness realistically so that we are well prepared to take advantage of the opportunities that a recovering economy will present.”

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NCUA’s suit alleges the firms made misrepresentations in connection with the underwriting and subsequent sale of mortgage-backed securities to U.S. Central, Western Corporate and Southwest Corporate federal credit unions. All three corporate credit unions became insolvent and were subsequently placed into NCUA conservatorship and liquidated as a result of losses from these faulty securities.

“The damage caused by the actions of firms like Washington Mutual has been extremely expensive to contain and repair, and that job isn’t finished, yet,” said NCUA Board Chairman Debbie Matz. “All the credit unions we supervise and insure have had to share this burden, so it’s only right that the people who caused the damage be required to pick up that burden, as well.”

NCUA has similar actions pending against Barclays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, Wachovia and Bear, Stearns. NCUA has already settled claims worth more than $170 million with Citigroup, Deutsche Bank Securities, and HSBC.

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GAO found that the failures of the smaller banks in these states were largely driven by credit losses on commercial real estate (CRE) loans.

“The failed banks also had often pursued aggressive growth strategies using nontraditional, riskier funding sources and exhibited weak underwriting and credit administration practices,” GAO said.

GAO also found that CRE concentrations and the use of brokered deposits were associated with an increased likelihood of failure for banks across all states during the period.

“Fair value accounting also has been cited as a potential contributor to bank failures,” GAO said, “but between 2007 and 2011 fair value accounting losses in general did not appear to be a major contributor, as over two-thirds of small failed banks’ assets were not subject to fair value accounting.”

GAO made no recommendations with the study, but said it plans to continue to monitor the progress of the ongoing activities of the accounting standard-setters to address concerns with the loan loss provisioning model.

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