Who Will Be the First to Sue the CFPB?

WASHINGTON — When President Obama installed Richard Cordray as director of the Consumer Financial Protection Bureau, industry observers declared that a lawsuit was imminent.

But in the weeks following the controversial recess appointment, would-be plaintiffs have held up their hands one-by-one and said, "Don't look at us." Challenging the president's Constitutional authority — and the power of an agency director whose appointment may not be valid — is more complicated than many first assumed.

A successful lawsuit depends entirely on whether the plaintiff has standing — or the legal right — to bring a case in court, and whether they can prove that they were harmed by some action the bureau took that it wouldn't be able to take without a director.

That means a lawsuit will likely wait until the agency takes an enforcement action against a nonbank lender, lawyers said.

"The only people who are going to have standing in the near future are people who the bureau targets for an enforcement action, either in court or through the administrative process at the CFPB," said Alan Kaplinsky, a partner with Ballard Spahr. "Once that happens, then the target of that enforcement action may very well have standing."

An enforcement action would make it easier for a firm to claim the CFPB has done it material harm, such as imposing a civil money penalty or requiring a bank to change the way it does business.

But no one is sure when the first enforcement action will come.

CFPB officials have made clear that addressing problems in the mortgage market and stopping illegal payday lending practices are top priorities.

Asked about ongoing investigations and potential enforcement actions, Cordray told a crowd at the Brookings Institution earlier this month that the agency had "lots of work in the pipeline," but declined to say when it might take action.

"We are actively moving forward on all fronts and will have more to say as things ripen," he said.

While the bureau will issue enforcement actions against banks and nonbanks, observers said banks are unlikely to challenge the bureau's authority.

For one, banks are subject to supervision and enforcement even without a Senate-confirmed director, and the question of whether Cordray's recess appointment was valid has no bearing.

Although a bank could challenge an enforcement action related to "abusive" acts or practices — the bureau does not have the authority to enforce that standard without a director — banks are also usually reluctant to take a regulator to court.

"You don't see the Bank of America's suing because you cannot be a federal depository and not get along with your regulator," said Mark Calabria, a former top aide to Sen. Richard Shelby, and the director of financial regulations studies at the Cato Institute. "If you're some little payday lender somewhere, you don't care what Washington thinks — or you care a lot less."

Nonbank lenders could also try to sue after the CFPB issues a regulation directly affecting them.

The bureau already has several rules on its plate, including a larger participant regulation that would establish a test to determine which nonbanks are subject to CFPB supervision. It must also finalize a rule requiring a lender to verify a borrower's ability to repay a loan, and establishing a so-called qualified mortgage that would presumably satisfy that requirement.

The bureau is also working with other regulators to establish new industry standards for mortgage servicing, a process that has been delayed as officials try to coordinate their actions with a global settlement led by state attorneys general.

Agency officials have said they are working to finalize the larger participant rule, but Cordray told reporters on Jan. 12 that he "can't really anticipate" when the bureau will release a qualified mortgage rule.

Financial institutions could start preparing a challenge now based on what they've seen in the bureau's requests for comment, said John Elwood, a partner with Vinson and Elkins LLP and a former senior deputy in the Justice Department's Office of Legal Counsel.

"People will have a look at the proposed regulations when they're published and be able to decide, based on that, whether there is a basis for a challenge, so that they could have a challenge in the can ready to file on the day that the regulations are made final," Elwood said. "I think you can say with a great deal of certainty that a challenger would be able to bring a challenge within a week."

It's even potentially possible a nonbank lender could move before a regulation has been finalized.

Victor Williams, a law professor at the Columbus School of Law at Catholic University in Washington, who has studied and written articles on the recess appointment process, said a nonbank could claim it has been harmed simply because it will now be supervised.

"I could see going ahead and moving forward with a lawsuit even before that time," Williams said. "If I'm a business and I'm about to be regulated, I'm already incurring costs. I'm already lawyering up in ways that I had not had to before. I don't want to run afoul of the law."

The question is whether any individual nonbank wants to shoulder the burden — and bad publicity — that a lawsuit against the CFPB would bring.

Some observers said nonbanks have just as much fear as banks in going after their new regulator. They may prefer for a trade association to file the lawsuit.

"It certainly would be safer for the individual company for the trade association to do it rather than themselves," said L. Richard Fischer, a partner with Morrison & Foerster.

So far, however, the trade groups most affected by the recess appointment have signaled they intend to play nice with Cordray.

The Chamber of Commerce, which opposed the bureau's creation under Dodd-Frank and has pushed for Republican-led reforms to its governance and structure, is considered a top candidate to sue.

"They have a superb litigation group — very, very sophisticated and very, very well run," Elwood said. "And as a trade group they would have representational standing on behalf of their members."

But Chamber President and CEO Tom Donohue said this month the group does not intend to sue the bureau.

That echoed remarks from other trade groups.

"I want to make it perfectly clear, we are not suing our regulator," Bill Himpler, the executive vice president of federal affairs at the American Financial Services Association, said at a conference of bank consumer lawyers in Salt Lake City this month.

Ted Saunders, the spokesman for the Financial Service Centers of America, a trade group representing payday lenders and other alternative financial services, said "my understanding is that our trade organization is not going to actively participate in any legal action with the bureau."

Still, many lawyers don't accept that a nonbank lender will not sue.

"If something impacts them they'll sue," said Kip Weissman, a partner with Luse, Gorman, Pomerenck & Schick. "It seems more likely that it could be some type of payday lender or (other nonbank) where the regulations really threaten their entire business model. But I think the strategy for everybody is to keep your powder dry."

They may not want to wait long, however.

Ray Natter, a partner with the law firm Barnett, Sivon and Natter, published an article in the firm's newsletter that said early court cases found that a person couldn't challenge the validity of an appointment in the same lawsuit challenging an agency action.

Recent court cases have found that a plaintiff may challenge an administrative action based on the validity of the appointment only if two conditions are met. One, the plaintiff must bring his lawsuit at or around the time that the challenged action occurred, and he must show that the agency was aware "of claimed defect in the official's title to office."

The sooner a plaintiff files a challenge, the more likely it may be that a court will overturn an agency's actions.

Natter said courts have long recognized the "de facto officer doctrine," which says that rules or decisions issued by a person acting under an official title are valid, even if the person's appointment is later determined to be invalid. This allows the court to come up with a remedy that causes the least amount of disruption as possible, Natter said.

"If this gets resolved in the next month or two and the courts find the appointment unconstitutional, they could very well decide that nothing he's done is valid, because it's only been a few months," Natter said. "But if it's two years from now, they're not going to do that."