A battle between the White House and Democrats over warring appointments to head up the top U.S. regulator for consumer finance is likely headed for the courts, opening any interim actions by the agency to legal challenges, lawyers said on Saturday.
Richard Cordray, a Democrat, stepped down on Friday as director of the Consumer Financial Protection Bureau (CFPB), which was created after the financial crisis to protect consumers from abusive lending practices, and he named staffer Leandra English as acting director.
A few hours later, President Donald Trump named someone else to lead the agency: Mick Mulvaney, the White House budget director and one of the CFPB's fiercest critics.
The CFPB, the brainchild of Senator Elizabeth Warren, a Democrat and a liberal firebrand, has long been in the crosshairs of Republicans, who say it has had too much unchecked power.
On Saturday, Trump tweeted that the CFPB - which has imposed steep penalties on banks, auto dealers, student lenders and credit card companies for predatory lending practices - had "devastated" financial institutions.
Democrats and Republicans agree that Trump may nominate a permanent CFPB chief, but they disagree over who may lead the agency in the interim, a dispute which could drag on for months until the Senate confirms a permanent Trump appointment.
The dispute is over which federal law prevails in naming an interim director. According to Democrats, the relevant law is the 2010 Dodd-Frank Wall Street reform law that created the CFPB, which stipulates that the agency's deputy director is to take over in the short term.
Cordray, in announcing his resignation on Friday, said he had named English as deputy director and that she would become the acting director.
But administration officials say the 1998 Federal Vacancies Reform Act gives the president the power to temporarily fill agency positions, except for those with multi-member boards - an exemption they said did not apply to the CFPB.
On Saturday evening, the Justice Department said in a memo that the White House was right to name a new CFPB director.
The Dodd-Frank language about changing CFPB directors is "unusual" but the White House may name an interim chief, according to the memo.
Such advice from the Justice Department is open to legal challenge.
Alan Kaplinsky, head of the Consumer Financial Services Group for law firm Ballard Spahr LLP, said the issue will likely have to be decided in the courts. In the meantime, he said, "This enormous cloud of uncertainty" will hang over the CFPB.
Kaplinsky said he believes that Dodd-Frank provides for the deputy director to take charge during the short-term, but Congress did not explicitly list the resignation of the director as a situation where the deputy would step up.
"I think Trump wins, but unfortunately it is going to take a while," Kaplinsky said.
Quyen Truong, a partner at law firm Stroock & Stroock & Lavan who was the assistant director and deputy general counsel for the CFPB until early 2016, said the industry should expect CFPB staff to continue their work, but that the "agency’s actions during this period almost certainly will be subject to legal challenge."
Despite the legal uncertainty, Mulvaney is expected to "show up Monday and he will go into the office and start working,” a senior administration official said on Saturday. White House officials said English was also expected to turn up on Monday and serve as Mulvaney’s deputy.
English could not be reached for comment.
Cordray is the only person to have led the young agency, making this the first time that succession of the director has been tested.
Administration officials said the appointment of Mulvaney was "routine" and that the White House had sought guidance from the Justice Department before Friday's announcement.
"This needs to be decided in the courts," Warren said in a tweet on Saturday.
Industry critics said the succession battle underlined that the agency lacks proper Congressional oversight.
"The CFPB's current governing structure is a dictatorship, period," Richard Hunt, head of the Consumer Bankers Association, a trade group for retail banking, said in a statement.
Democrats and consumer advocates said it was unfair and inappropriate to put Mulvaney - who once described the CFPB as a "joke" - in charge.
Maxine Waters, the top Democrat on the House of Representatives' Financial Services Committee, said Mulvaney would have too much power, as the CFPB director also sits on the boards of two other financial regulatory agencies.
"The White House would have an alarming degree of direct control over financial regulation, supervision, and enforcement," Waters said in a statement.