What Cordray and the Consumer Financial Protection Bureau Mean to You

by Wendy Simmons | January 9, 2012 1:45 pm

During the holiday break, President Barack Obama made a recess appointment to head the new consumer agency created by the Dodd-Frank Bill. Richard Cordray is mild-mannered Ohioan, a five-time Jeopardy! champion and a former attorney general who is admired by Republicans and Democrats alike. So why has there been such a fuss?

The problem has a lot less to do with “who” than it does “how” and “why.”

Dodd-Frank accomplished many things, one of which was creating the Consumer Financial Protection Bureau. From its own website:

“The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.”

Now, this mission sounds fairly benign, bipartisan and helpful, no? Who doesn’t want markets to work for Americans? That is, indeed, the central idea of capitalism in this country.

Well, Republicans have been doing everything they possibly can to prevent this new agency from getting off the ground and fulfilling its duties. Most notably, the Senate has refused to consider confirming a director to the bureau. The GOP generally is not happy about any new regulatory body, but its specific complaint in this case is largely twofold: The CFPB has only one director (not three, like many government agencies), and it is not accountable to Congress for its budget because it is housed within the Federal Reserve and receives monies from that agency.

So, during the Christmas break, while the Senate was on holiday break, President Obama appointed Richard Cordray to head the agency. While the Constitution gives the president the power to appoint people without the confirmation of the Senate if it is “in recess,” Republican Senators were outraged, as they believe the Senate was not technically in recess.

Years ago, members of both parties began “convening” the Senate for a few seconds every couple of days with just one or two members present to prevent the president from making recess appointments. This is a particularly political move — of which both parties are guilty — that is meant to deprive the executive branch of one of its responsibilities.

Cordray himself seems to be of little importance in the argument. Cordray is a former Ohio attorney general who has a deep background in law and economics and has been well-regarded across the political spectrum[1].

Cordray was the first attorney general to sue a mortgage lender for the robo-signing scandal and led a class-action lawsuit against Bank of America. He is a hero of many consumer advocacy groups and seemed to be a safe choice for Obama after his first pick, Elizabeth Warren, was not able to overcome GOP opposition.

But the GOP is outraged that Obama did not allow the Senate to flex its obstinate muscles and continue to block the work of the CFPB. Whether Republicans have reason to be mad is politically immaterial. What does matter is that the possibility of Cordrays’s nomination being illegal (since the Senate was technically not in recess) opens the door for a lot of lawsuits down the road, and thus more uncertainty and costs.

Still, the legal conundrum the Obama administration might find itself in is too theoretical at this point to analyze. For now, he made the right choice to force the work of the CFPB.

Pros and Cons

While the CFPB has been operating since July 2011, it has been able to oversee only traditional banks. When Cordray took over as director, its authority was extended to non-banks as well. This means firms that provide financial services or products — such as payday lenders, mortgage servicers and private student loan operators — now will be regulated and monitored in some of the same ways that banks have traditionally been.

Since the bureau still is in its infancy, it is impossible to know how effectively it will protect consumers. But let’s examine a few of the possible benefits and pitfalls.

The CFPB has a lot of potential to educate consumers about products and force credit card companies, mortgage companies and the like to make their products more understandable. One of the many structural problems that led to the housing bust was that lots of people took out mortgages they did not understand. The initial low rates were advertised and emphasized well, but the increasingly high rates were buried in fine print after pages of legalese. When homeowners’ rates went up dramatically, they were both surprised and unable to make the payments. This (combined with the plummeting of the value of their homes) led in part to many foreclosures. This new agency is responsible for ensuring that borrowers understand the terms of their loans and that lenders are not able to provide confusing, deceitful forms.

The bureau is currently seeking comments on many forms that it is working to simplify. I have been perusing the site[2] myself and find it user-friendly.

Another potential benefit is the consolidation of consumer financial regulation into one agency. Before the 2008 bust, rules and regulations covering consumer financial activity were spread over a variety of agencies and thus not particularly accountable to anyone. One of the main ideas behind the bureau is to consolidate power in one agency to make the regulations more effective.

Now for a few of the possible negatives.

The CPFB creates a special unit that is focused on protecting seniors. The bureau is able to compensate “victims” of financial fraud. Since this group tends to rely on fixed incomes and because seniors often are victimized, it seems like a good idea to provide special safeguards for older Americans.

However, as we well know from the Medicare and Social Security crises, providing seniors with special financial benefits is a ticking time bomb that will explode over and over again as the baby boomers hit 65. Although it is not an entitlement program, the idea that we are again singling out this group for possible financial benefit strikes me as extremely expensive.

The GOP argues that the bureau having only one director, who is appointed by the president and not accountable to Congress, consolidates too much power in one, unelected individual. Some other agencies are by law required to have directors from both political parties. Whether this is a real problem will depend on the director.

If, as Richard Cordray seems to be so far, the director is a competent and honest public servant, then having one person in charge is obviously the most efficient way to work. On the other hand, since the agency does have a wide reach, a corrupt or incompetent director would be a disaster. However, Congress has proven itself to be an incompetent and incapable of bipartisan compromise. We cannot assume that its oversight would benefit the agency.

The biggest potential problem with the agency is that it could have the unintended consequence of eventually driving up costs for consumers. This is a mixed bag. On the one hand, we simply must have stronger oversight of financial products and marketing so consumers are not again lulled into a maze of confusing debt. On the other hand, the cost to firms of defending themselves in investigations and complying with new rules will be passed along to their customers.

Theoretically, increased transparency of prices and services should make the market more efficient for all players. Only time will tell whether the CFPB will be able to effectually police financial services without punishing their customers.

Endnotes:
  1. well-regarded across the political spectrum: http://www.washingtonpost.com/business/cordray-new-obama-consumer-watchdog-called-smart-tough-independent-of-partisan-concerns/2012/01/08/gIQAN6amjP_story_1.html
  2. the site: http://www.consumerfinance.gov/

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