Constitutional issues surround CFPB

On July 16, 2013, Richard Cordray was confirmed by the U.S. Senate as Director of the Consumer Financial Protection Bureau, the agency that oversees the financial services sector, including the prepaid card industry. Cordray's election to the five-year post at the fledgling agency comes amid more evidence that his initial appointment to the post may have been unconstitutional. Additionally, a recently filed federal lawsuit alleges the CFPB overstepped its information gathering powers.

On July 17, the 4th U.S. Circuit Court of Appeals in Richmond, Va., ruled that the so-called recess appointments of three National Labor Relations Board members made by President Obama on Jan. 4, 2012, were unconstitutional. That decision follows rulings in the district courts of the District of Columbia and Philadelphia earlier this year that Obama's appointments were unconstitutional because the appointments were made when the Senate was in session and not in recess.

The rulings may impact Cordray's appointment because Obama named him to the CFPB post on the same day he made the other appointments. If Cordray's appointment is eventually ruled unconstitutional, the CFPB's actions to regulate the financial services industry may be invalidated. The U.S. Supreme Court has agreed to hear the NLRB case.

Suit alleges power overreach

The scope of the CFPB's powers have also been debated. Republican lawmakers in the Senate held up Cordray's initial appointment because they believed the structure of the CFPB, with one politically appointed director heading the agency, might result in an abuse of power. That argument may have gained weight by the lawsuit filed July 22, 2013, against the CFPB by legal software provider Morgan Drexen.

Venable LLP, the law firm representing the legal support firm, said in a statement that Morgan Drexen alleges the CFPB attempted to collect material that is constitutionally protected by attorney-client privilege. The suit claims the CFPB demanded that attorneys contracted with Morgan Drexen to provide services for the possible bankruptcies of Morgan Drexen clients produce documents containing personal financial information of those clients.

Reportedly, the CFPB told Morgan Drexen that the only way it can comply with CFPB directives is to stop providing to its clients debt settlement services as a component of bankruptcy services through those attorneys. "As a result of the CFPB investigation, Morgan Drexen lost its credit facilities," Venable said. "The company now pays 22 percent interest where, before the investigation, Morgan Drexen was able to obtain financing at 4.5 percent."

The suit also makes the case that provisions of the Dodd-Frank Act of 2010, which created the CFPB, should be struck down. Payments industry insiders have expressed concern about the scope of the agency's regulatory authority over the growing prepaid card industry.

Editorial Note:

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