On opening day, CFPB faces long months of debate
The Consumer Financial Protection Bureau officially opened Thursday, but critical structural changes could face many months of debate.
On Monday, nearly one year after the passage of the Dodd-Frank Act and one full year of the bureau's assembly, President Obama nominated former Ohio Attorney General Richard Cordray as director. But a group of 44 Republican senators, enough to filibuster an approval, pledged to thwart Cordray until a commission is established instead of a director and more power is given to the Financial Stability Oversight Council to veto CFPB rules.
Republicans are also seeking to move the CFPB funding onto the federal budget, which would give Congress oversight authority over how the money is spent.
"They are going to tie any changes to the structure of the bureau to any nomination. It's going to become quite interesting," said Rich Andreano, an attorney on the mortgage department of law firm Patton Boggs.
Obama said he would fight any changes to the structure of the bureau approved by Congress last year.
At a hearing Tuesday over the CFPB, Sen. Richard Shelby (R-Ala.), who drafted the letter, said the bureau cannot be held accountable the way it is currently drafted.
"This concentration of power violates our nation’s basic democratic principles," Shelby said. "Our national government was carefully crafted to diffuse authority and prevent one person from exercising power arbitrarily."
Adam Levitin, professor of law at Georgetown University, said at the hearing Tuesday it wouldn't make any sense to replicate the CFPB like other federal regulators that failed to catch the mortgage meltdown and the ensuing financial crisis.
But Levitin pointed out the CFPB is not without oversight. The bureau will be subject to small business reviews from the Office of Management and Budget, mandatory and annual audits from the Government Accountability Office and will be subject to the new Federal Reserve inspector general.
"It has shown an extreme willingness to listen to regulators, consumer advocates and financial institutions," Levitin said. "It's trying to find the right balance between consumer protection and ensuring we do not have too many restrictions on business."
But Andrew Pincus, representing the Better Business Bureau, said FSOC would need such a large majority to overturn a rule it deems would be a systemic risk that the veto power is almost negligible.
"The voting structure is set up to never have such an action," Pincus said.
Albert Kelly, the CEO of SpiritBank, said the CFPB will put too much regulatory weight on smaller banks like his.
"None of those banks are going to rise to systemic risk," Kelly said. "In fact, as a collection those banks will never rise to systemic risk. It's very, very difficult to take up the compliance with Dodd-Frank."
When Shelby asked if the CFPB would create any jobs, Kelly responded that it would have the opposite effect.
"Today, I can think of thousands of jobs that we could have funded, but if that loan came in we wouldn't even take it down to the committee. It would require imagination and creativity, and today, quite frankly most are running their banks to comply, not to generate business or create jobs."
Levitin noted the hundreds of thousands of jobs lost because there was no agency like the CFPB in place to protect consumers from these misleading and hard-to-understand loans.
Trade groups are beginning to weigh in as well. On Wednesday, the Mortgage Bankers Association CEO David Stevens sent a letter to Rep. John Boehner (R-Ohio) and Rep. Nancy Pelosi (D-Calif.) backing H.R. 1315 from Republicans that would establish a commission and give the FSOC more power.
"MBA consistently supported the legislation's underlying goal of merging disparate consumer financial regulatory functions under one roof," Stevens wrote. "The creation of the Bureau of Consumer Financial Protection, while achieving that goal, did so at the risk of assuring sufficient oversight and appropriate governance of the CFPB — something this bill aims to rectify."
While director of the Federal Housing Administration, Stevens assisted in passing the section under Dodd-Frank that established the CFPB structure he now supports changing.
"We passed the Dodd-Frank Wall Street Reform bill, which addresses many of the systemic issues in the financial system... And perhaps most important of all, it created a Consumer Financial Protection Bureau that will help protect consumers against precisely the kinds of negligence and abuse we’re now finding in the foreclosure processes of some servicers," Stevens testified in November 2010 before the House Financial Services Committee.
Stevens clarified in a statement to HousingWire that he has always supported the underlying goal of merging the disparate roles of other agencies under one roof, but the sheer size and scope of setting up something this large and influential requires changes.
"Any time you do a massive bill like this, policymakers find the need for amendments and technical corrections, and we think the changes we outline in the letter will improve the operation of the bureau," Stevens said.
The CFPB is set to open Thursday as the de facto regulator for the entire mortgage industry, from origination through servicing. However, without a director, the bureau would lose its authority over payday lenders, debt collectors and nonbank financial institutions.
Andreano said he understands the need for a commission that the director would report to and stressed that giving such a director too much power could back fire on Democrats. If a Republican president chooses to in the future, he or she could appoint a director with the power to gut the bureau and enforce very few actions. The problem with the legislation's language, Andreano said, is that it too often refers responsibilities to "the director" rather than "the bureau." That's unheard of in legislation setting up other agencies.
"The law of Dodd-Frank in this area it's very interesting. You read it and you say: Boy can someone proofread this?" Andreano said. "It refers to the bureau, and other cases to a director enough times you say: If there is no director, what can it do officially?"
Andreano doesn't see anything being settled on Cordray or the structural standoff until September when Congress comes back from its recess. In the end, even with the difficulties seen between the two parties over recent debt ceiling talks, Adnreano said a compromise will eventually be reached.
"I think there is room for debate. I could certainly see a compromise," Andreano said. "Maybe, if there is a commission in place with checks and balances, then maybe Republicans will agree to keep the bureau's funding off budget and outside of the political up-and-down. But the longer we go without a director, the more issues will arise."
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