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Bank Watchdog Caught by Court Choke Chain

McConnell himself said that "for the same reasons, this decision now casts serious doubt on whether the President's 'recess' appointment of Richard Cordray to the Consumer Financial Protection Bureau, which the President announced at the same time, is constitutional."

Frank Mayer III -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP in Philadelphia -- says that the ruling against the NLRB recess appointments "has significant implications for the appointment of Richard Cordray, who was appointed in the same manner, on the same day," and that there "certainly is a potential cloud over the quasi-rulemaking that this agency has been making, as there is pending litigation pending concerning the director's power in light of him being appointed in this manner."

Another federal court will be deciding on the legitimacy of the president's recess appointment of Cordray, and Mayer said that "if there is a split in the circuits, ultimately it may go to the Supreme Court."

Mayer also said that the outcome of the federal court cases will be very significant to non-bank financial companies, including mortgage originators and vendors, "as it undermines the validity of all CFPB regulations, as far as they are concerned."

The Consumer Financial Bureau last Friday announced its final rulings on several mortgage lending sales practices, to "prevent loan originators from steering consumers into risky mortgages."

Kevin Petrasic -- a partner in the Global Banking and Payments Systems practice of Paul Hastings in Washington -- says that Cordray, or whoever is eventually confirmed as the permanent director of the CFPB, may follow the example of former Office of Thrift Supervision Director Ellen Seidman, who in 1997 "essentially ratified all of the actions of the previous acting director Jonathan Fiechter out of an abundance of caution," because of a challenge to the agency's authority when the "acting director had served too long under the Vacancies Act."

"This puts more emphasis on Cordray being confirmed," Petrasic says, "because the best way for the CFPB to inoculate itself from challenges to actions taken based on the recess appointment the director, is for a confirmed director to essentially ratify the actions taken by the recess-appointed director," even if it is the same person.

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