President Obama Wednesday surprised everyone by appointing Richard Cordray as Director of the new Consumer Financial Protection Bureau (CFPB). It was not surprising that the President tapped Cordray, the man he nominated in July to fill the position. It was surprising that Obama made a recess appointment at a time when Congress is not technically in recess.

There will be much fighting and legal challenges over this move in the months to come. There will be legal challenges because the appointment falls into a poorly-defined legal gray area, where both sides can strongly argue their position. There will be fighting because that’s what politicians do. More on that in a minute.

For now, what does the appointment mean for the CFPB and the financial industry (and the non-bank financial industry)?

Under the power bestowed by its original legislation — The Dodd-Frank Wall Street Reform and Consumer Protection Act — the CFPB has regulatory power over all bank and non-bank financial institutions in the U.S. The agency has been regulating banks and major credit card issuers for a while now, so the impact of a new director for large banks will be nil. But the legislation specifically calls for a CFPB Director to be in place before it can regulate the non-bank institutions.

What is a non-bank financial institution under the CFPB? Any mortgage, student loan, or credit card lender not meeting the definition of a “bank,” credit reporting bureaus, payday lenders, debt relief services, and the ARM industry (debt collection agencies and debt buyers). But even among those businesses, there are tiers of CFPB influence.

The regulation plan for the ARM industry, credit reporting bureaus, debt relief companies and a few other business types went out for public comment in June 2011, closing in the fall. The CFPB must now take the comments, compile a report, revise its regulation plan accordingly, and submit the plan to the President for his formal approval. That process could take months…or longer. And the CFPB cannot regulate these businesses until the process is completed.

Meanwhile, payday lenders, non-bank mortgage companies, and student loan providers will immediately fall under the authority of the CFPB. This is the tier of non-bank companies that have been “waiting” for a Director.

Was Cordray’s appointment legal, and will it stand?

Unsurprisingly, the Obama Administration says yes, and Congressional Republicans say no. And because the process of recess appointments isn’t written in stone in the Constitution, both sides have a point.

A president is legally allowed to make a recess appointment when Congress is in, yeah, recess. So is Congress in recess, and is this a recess appointment, or an “arrogant power grab” by the President, as Senate Minority Leader Mitch McConnell said Wednesday?

The administration is framing this as a recess appointment.

But Congressional Republicans insist that the legislative body is in session, despite a very public month-long adjournment that began in late December. The House of Representatives, which features a Republican majority, has been calling pro forma sessions of Congress every three days. This is a session where no business is conducted; a formality. In fact, House leaders are calling the sessions specifically to block Obama from making recess appointments. Because of a Constitutional rule that forces both chambers to agree to a session, the House’s pro forma sessions have put the Senate into session as well.

And this is where the lawyers get to shine. The Senate is controlled by Democrats, and the Senate has the advice and consent directive from the Constitution as it relates to Presidential appointments. The House is largely irrelevant in the process. Many people will point to the Senate’s own pro forma sessions in the last two years of George W. Bush’s presidency to block his recess appointments. But Democrats controlled the Senate then. So it was calling itself into session, rather than being dragged into session by the House.

This distinction is also important when discussing intent. Presidential recess appointments are primarily used to avoid the Senate confirmation process when the President is of a different party than the Senate majority. That is not the case now, of course. Obama had to use recess appointments because, while he had the votes to confirm Cordray in the Senate, Republicans in the chamber have been blocking a vote on the CFPB director through the use of filibusters. And since the Democrats’ majority is less than 60 percent, the filibusters cannot be broken.

There will also be arguments made about what constitutes a “session,” precedents on pro forma sessions and length of the recess, and a lot of other things. We’ll have to wait for the lawsuits to see how it will all go. What is known is that the fight will be nasty. McConnell’s official press release Wednesday on the matter carried the headline, “Arrogantly Circumventing the American People with an Unprecedented ‘Recess Appointment’ of an Unaccountable Czar.” Obama for his part cast Senate Republicans as obstructionist and said Wednesday at a speech in Ohio, ‘“I will not stand by while a minority in the Senate puts party ideology ahead of the people they were elected to serve.”

But for now, the CFPB has a director. And while the ARM industry does not currently fall under its authority, once the approval process is done for its regulation plan, debt collectors will have a new federal regulator. There has already been plenty of speculation about how the CFPB will tackle the ARM industry.

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