InfoBytes Blog

DOJ Releases Memorandum on Legality of Recess Appointments

On January 12, the Department of Justice Office of Legal Counsel, which is responsible for providing legal advice to the President, released the memorandum it prepared in advance of the President’s recent decision to appoint Richard Cordray as CFPB Director. In short, the memorandum finds when the Senate is in a periodic pro forma session in which no business is to be conducted, the President may (i) conclude that the Senate is unavailable to perform its advise-and-consent function and (ii) exercise his power to make recess appointments. Pro forma sessions do not have the legal effect of interrupting an intrasession recess otherwise long enough to qualify as a "Recess of the Senate” under the Constitution. The conclusions are based on three considerations explored in detail in the memorandum: (i) the original understanding of the framers and the “longstanding views” of the executive and legislative branches with regard to the practical availability of the Senate to consider nominees, (ii) the inconsistent result of allowing pro forma sessions to prevent Presidential recess appointments given the purpose of the recess appointment clause and historical practice in similar situations, and (iii) the need to preserve constitutional separation of powers.

CFPB

President Obama Appoints Richard Cordray CFPB Director; CFPB Fills Other Top Positions

On January 4, President Obama invoked his office's recess appointment authority and appointed former Ohio Attorney General Richard Cordray as Director of the CFPB. Mr. Cordray had been serving as Assistant Director for Enforcement at the CFPB while his nomination for Director was pending in the Senate. Although approved by the Senate Banking Committee, Mr. Cordray's confirmation had been blocked by lawmakers seeking to make substantive changes to the CFPB, such as replacing the director structure with a five-member commission. Republican senators objected to Cordray's appointment on constitutional grounds. They have argued that because the Senate has been holding "pro forma" sessions during its recess, President Obama lacked the authority to make a recess appointment. Click here for additional explanation from the White House.

On January 6, Mr. Cordray appointed Raj Date as Deputy Director of the CFPB. Most recently, Mr. Date, as Special Advisor to the Treasury Secretary, was responsible for operation of the CFPB pending confirmation of a director. Additionally, Mr. Cordray elevated Kent Markus to Assistant Director of the Office of Enforcement. Mr. Markus had been the CFPB Deputy Assistant Director of the Office of Enforcement.

CFPB Single-Director Structure

Supreme Court Strikes Down Vermont Prescription Data Law

On June 23, the United States Supreme Court held that the Vermont Prescription Confidentiality Law (PCL) improperly restrains speech in violation of the First Amendment to the United States Constitution, which is likely to have impact on similar restrictions on use of financial information. Sorrell v. IMS Health Inc., No. 10-779 (June 23, 2011). The PCL, absent a prescriber’s consent, prohibits prescriber-identifying information from being (i) sold by pharmacies and similar entities, (ii) disclosed by pharmacies and similar entities for marketing purposes, or (iii) used for marketing purposes by pharmaceutical manufacturers. However, the PCL sets forth a number of exceptions to these prohibitions-for example, if the information is to be used for "health care research." Vermont enacted the PCL to, among other things, address pharmaceutical manufacturers’ use of prescriber-identifying information to more effectively promote brand name drugs through sales representatives that meet with prescribers. The Court found that the provisions of the PCL under examination impose content- and speaker-based restrictions on the sale, disclosure, and use of prescriber-identifying information. In doing so, the Court emphasized that the law disfavors speech with a particular content (i.e., marketing) and particular speakers (i.e., the sales representatives), while allowing prescriber-identifying information to be purchased, acquired, and used for other types of speech and by other types of speakers. Therefore, the Court found that the PCL provisions are subject to heightened judicial scrutiny. Under such a standard, the PCL, in order to sustain its restriction on protected expression, would need to advance a substantial government interest and be drawn to achieve that interest. The Court found that while the PCL possibly advances a proper interest (e.g., lowering healthcare costs and improving public health), it does not permissibly achieve such an interest, making the selling, sharing, and use limitations of the PCL unconstitutional. The decision, authored by Justice Kennedy and joined by five others, affirmed the Second Circuit’s judgment.

State Issues

Fifth Circuit Holds Variable Rate Home Equity Loan Did Not Violate Texas Constitution

On July 22, the U.S. Court of Appeals for the Fifth Circuit affirmed a decision by a Texas district court finding that the terms of an adjustable rate home equity loan did not violate the Texas Constitution. Cerda v. 2004-EQR1 L.L.C., No. 09-50619, 2010 WL 2853651 (5th Cir. July 22, 2010). In response to a foreclosure proceeding, the plaintiff borrowers in Cerda alleged that the terms of a 2002 home equity loan refinance violated the Texas Constitution because (i) it was issued in violation of a mandated waiting period of 12 days between submission of an "application" and closing, (ii) it called for monthly payments that were not "substantially equal," and (iii) it required the payment of fees in excess of a 3% cap. The district court rejected these arguments and, following a bench trial, granted judgment to the defendants. The Fifth Circuit affirmed in all respects. First, the court held that an oral application, which the borrowers indisputably made over the telephone more than 12 days before the loan closed, was sufficient to commence the required waiting period. Second, with respect to the Texas Constitution’s requirement that scheduled payments on home equity loans be "substantially equal" in amount, the Fifth Circuit recognized that the provision was "in some tension with" a separate provision explicitly permitting "variable rate[s] of interest." The Fifth Circuit reconciled the provisions by holding that, in combination, the provisions merely required that home equity loans fully amortize - i.e., that installments extinguish principal and interest over the life of the loan - and, in addition, that there be no final, "balloon" payment. Because the plaintiffs’ loan comported with these requirements, the Fifth Circuit held that the "substantially equal" provision had not been violated. Third, the Fifth Circuit held that the loan did not exceed a 3% cap on fees, reasoning that the yield spread premium on the loan was not a "fee" because it was paid by the lender - not the borrower - to the broker, and that discount points are properly considered to be interest rather than a fee subject to the cap. As the Fifth Circuit noted, its rulings were based on the Texas Constitution as of 2002. Since that time, certain provisions at issue in this case have been amended.

Arkansas Increases Usury Limit

Arkansas residents recently voted to increase the maximum allowable rate of interest on all loans or other financing transactions entered into within the state. The maximum allowable rate, which is set out in the state constitution, had recently been below 6% per year. Fearful that such low rates chilled business in the state, the voters approved an amendment to the Arkansas constitution that raises the maximum lawful rate of interest for federally insured depository institutions to that which is set out at 12 U.S.C. § 1831u and 17% for all other institutions. The changes become effective January 1, 2011

Texas Court of Appeals Upholds 3% Cap On All Lenders’ Fees on Home Equity Loans

On January 8, the Texas Court of Appeals upheld a trial court’s ruling that "fees" that are considered "interest" under Texas usury law are subject to the 3% fee cap for home equity loans contained in the Texas constitution. Texas Bankers Ass’n. v. Ass’n. of Community Organizations for Reform Now, No. 03-06-00273-CV, 2010 WL 4587 (Tex. App. Jan. 8, 2010). The case arose after the Finance Commission of Texas and the Credit Union Commission of Texas (collectively, the Commissions) issued a rule interpreting Article 16, section 50(a)(6)(E) of the Texas Constitution. This section restricts the total amount of fees, other than interest, that can be charged on home equity loans to 3%. In interpreting the section, the Commissions stated that the term “interest” mirrored the definition of interest in Texas usury laws. As a result, the Commissions’ regulations permitted certain types of fees to avoid the 3% cap. The Association of Community Organizations for Reform Now (ACORN) challenged the Commissions’ interpretation under the Texas Administrative Procedures Act, arguing that it contradicted the Constitutional provision’s plain meaning. Instead, ACORN advocated a strict definition of interest that would include only the amount of interest described in the promissory note and would exclude fees. Both the trial court and the Texas Court of Appeals agreed. In upholding the lower court, the Court of Appeals reasoned that the Commissions’ interpretation (i) would render the Constitutional cap meaningless, because it would exclude nearly all fees charged by lenders, and (ii) conflicted with legislative intent. As a result, the court affirmed the invalidation of the regulations.

Maine Federal Court Finds Maine Data Collection Law Likely Violates First Amendment

On September 9, the U.S. District Court for the District of Maine held that a recently passed Maine Act requiring parental consent for the collection of health-related information from a minor is likely overbroad and thus could violate the First Amendment. Maine Independent Colleges Ass’n v. Baldacci, No. CV-09-396 (D. Me. Sept. 9, 2009). As reported in InfoBytes, Aug. 7, 2009, the Act makes it an illegal and unfair trade practice for a person or company “to knowingly collect or receive health-related information or personal information for marketing purposes from a minor without first obtaining verifiable parental consent of that minor’s parent or legal guardian.” On August 26, four plaintiffs, including the Maine Independent Colleges Association, challenged the constitutionality of the law, scheduled to take effect on September 12, 2009. On September 9, the court issued a stipulated order of dismissal by both parties. According to the dismissal order, the Maine Attorney General “has committed not to enforce” the Act, and the Maine legislature will reconsider the statute. The dismissal order further notes that the private right of action availed under the Act “could suffer from the same constitutional infirmities.”