Written by H. West Richards, as originally published in The Reverse Review.

In a surprise move, President Obama installed Richard Cordray as the head of the Consumer Financial Protection Bureau (CFPB) by exercising a controversial recess appointment measure. Now that the CFPB has a director, it is no longer limited in its ability to

affect the regulatory landscape. The CFPB will enjoy very broad powers enabling it to make sweeping changes on the regulatory horizon and the reverse mortgage industry is certain to feel the effects soon.

The appointment of Cordray to the CFPB has triggered a concentration of unprecedented and unpredictable regulatory power into the hands of one institution, and to a certain extent, one man. While some argue that the structure of the CFPB affords the appropriate amount of oversight, others have suggested that the organizational oversight checks and balances are sorely lacking.

Background
Before we examine what has transpired, it is important to review some of the background leading up to these events, as well as revisit the structure and mission of the CFPB itself. The circumstances behind the creation of the CFPB are important to understand before we embark on any sort of assessment of the new regulatory climate the CFPB is likely to impose.

Obviously, the genesis of all of this can be found in the financial crisis of 2008, which many claim was due to a poorly implemented regulatory apparatus responsible for incentivizing bad behavior throughout the entire mortgage ecosystem.

The stated aim of the resulting Dodd-Frank legislation is to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

“… to protect consumers from abusive financial services practices” is the part that spawned the creation of the Consumer Financial Protection Bureau.

The CFPB is headed by a single director, appointed by the president and confirmed by the Senate, and holds office for a term of five years. The director may continue to serve after the expiration of his or her term until a successor has been nominated and confirmed. Should the president choose to appoint the director during a congressional recess, the director will not need Senate confirmation, and will be limited to a one-year term.

The director, and the bureau, are structured to be fully independent and are not subject to direct oversight by the Fed or any other federal financial regulator, Congress or the executive branch. The CFPB’s single director is a significant departure from the design of most other prominent consumer and investor protection regulators at the federal level. The leadership of agencies like the Securities and Exchange Commission, the Federal Trade Commission and the Federal Deposit Insurance Corporation is vested in bipartisan, multimember commissions.

What is the Bureau’s Mission?
As stated on its website, “the central mission of the 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.”

The CFPB will enforce 18 federal consumer financial laws and penalize companies that violate the law. Among the laws the CFPB can enforce are, inter alia, the Fair Credit Reporting Act; the Fair Debt Collection Practices Act; the Credit Card Accountability Responsibility and Disclosure Act; and the Truth in Lending Act; the Real Estate Settlement and Procedures Act.

Enforcement (Dodd-Frank Act §§ 1051-1055) Power to conduct investigations, hold hearings, and initiate litigation.

Investigative powers similar to those of the FTC, including the power to issue subpoenas and civil investigative demands calling for the production of documents, things, written responses, and depositions.

Authority to institute “cease-and-desist” proceedings whereby a regulated entity may be required to appear at a hearing within 30 to 60 days to show cause why a cease-and-desist order should not issue.

Option to file suit within a three-year statute of limitations. Available relief includes rescission and reformation of contracts, refunds and return of property, restitution, disgorgement, damages and other monetary relief, public notification, and severe statutory penalties.

More Background and Context
It was always President Obama’s intent to have Elizabeth Warren become the CFPB’s first director. After all, it was Warren who spearheaded the idea, design and implementation of the organization. Unfortunately, Congress was not prepared to make such a controversial nomination given severe concerns made public by the Republicans. In spite of this opposition, President Obama has managed to keep Warren on board in a supervisory role at the CFPB as special assistant to the president and special advisor to the treasury secretary. As an alternative to Warren, President Obama selected Cordray, who was singled out because he had responded to the most citizen complaints by any state attorney general in the entire U.S. Warren is now running for the U.S. Senate seat in Massachusetts.

What has transpired?
The president has leveraged the sparingly used “recess appointment” mechanism to appoint Richard Cordray as the executive director of the newly formed Consumer Financial Protection Bureau. The “recess appointment” mechanism allows a president to bypass the Senate nomination process but limits the appointee to a one-year term. As mentioned above, Richard Cordray is a former attorney general from Ohio with a very strong pro-consumer track record. Some say his consumer focus remains unmatched by any other AG in the United States. Warren, using her status as the creator of the CFPB and President Obama’s first choice for the position, has made it clear that she is a staunch supporter of Cordray. This unusual move by the president tests the limits of his executive authority to fill the post without Senate approval.

Senator Shelby, who serves as the ranking member on the Senate banking committee, summed up the Republican position in a July 21, 2011, Wall Street Journal article affirming continued opposition to a centralized structure, noting that both the Securities Exchange Commission and Federal Deposit Insurance Corporation had executive boards and that the CFPB should be no different, and that absent this type of board oversight structure, the CFPB director will have unprecedented powers.

The president’s decision drew quick criticism from Senate Republican leader Mitch McConnell, who stated that the president “arrogantly circumvented” the American people and upended “longstanding” practices that limited recess appointments. McConnell further stated, “Breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’ role in providing a check on the excesses of the executive branch.”

House Speaker John Boehner, an Ohio Republican, called the appointment an “extraordinary and entirely unprecedented power grab” by the president.

Alternatively, Barney Frank (D-MA), ranking member of the House Financial Services Committee and co-author of the Dodd-Frank bill on financial reform, stated, “The president’s appointment of Richard Cordray to be the director of the Consumer Financial Protection Bureau calls for congratulations – both to the president and to American consumers, who will now get the fullest measure of the protection promised to them in the financial reform bill which we passed last year. Republicans’ complaints about the president’s decision to make this recess appointment are equivalent to objections leveled by arsonists at people who use the fire door to escape a burning building.”

Having failed legislatively to block the creation of an independent consumer bureau (independent from undue influence from the financial industry), Republican senators bent the Constitution out of shape by hijacking the confirmation process to weaken the CFPB in ways they were unable to do through legislative process.

President Obama has responded in an entirely appropriate way to their refusal to consider a nomination, not because of any flaws in the nominee, but because they are frustrated that they are unable to repeal, or weaken, a duly passed statute. Even the most extreme opponents of consumer protection have not raised any serious objection to Cordray’s qualifications, and he has in fact been supported in a bipartisan way by many of those with whom he has worked ??when he was attorney general of Ohio.

The installation of Cordray as director means that consumers will now be protected against a full array of financial practices. This does not mean that the majority of payday lenders, or check cashers, or people involved in transmitting cash remittances, are dishonest or unscrupulous. It does mean that in any business, there will be those who will try to take unfair advantage of consumers, and those consumers will now have a strong, well-constructed, independent agency to which they can turn in those cases.”

The leadership in the Senate also had a perspective around the recess appointment of Cordray. Senate Banking Committee Chairman Tim Johnson (D-SD) released the following statement in response to the White House’s announcement of President Obama’s recess appointment of Cordray to be the first director of the Consumer Financial Protection Bureau.

“With Richard Cordray leading the Consumer Financial Protection Bureau, Americans will finally get the consumer protections they deserve. Cordray is eminently qualified for the job, as even my Senate Republican colleagues have acknowledged. As Banking Committee Chairman I look forward to working with Cordray and the CFPB as he moves forward on implementing long-overdue consumer financial protections for all Americans. It’s disappointing that Senate Republicans denied him an up-or-down vote, especially when it’s clear he had the support of a majority of the Senate.”

The key trade associations have also seen fit to voice their opinions.

In an email sent to the trade association’s membership, MBA President and CEO David H. Stevens pointedly failed to congratulate Cordray on his new position and warned that the recess appointment would only create a new round of partisan conflict.

“This action promises to further exacerbate the political tensions between Democrats and Republicans,” wrote Stevens, who served as Obama’s commissioner of the Federal Housing Administration before joining the MBA in April 2011.

While stating that the MBA has “taken steps to establish a positive working relationship with the CFPB’s leadership, including my own personal outreach to Mr. Cordray,” Stevens added that the trade group supported the Senate Republican position of reconfiguring the CFPB’s organizational schematics and federal accountability.

“MBA continues to support the need for important structural changes to the CFPB, namely that the director’s position be replaced by a five-person commission, that the CFPB be subject to the normal congressional appropriations process, that CFPB rules be subject to review by the Office of Management and Budget, and that votes to overturn CFPB decisions by the Financial Stability Oversight Council take a simple majority rather than a two-thirds vote,” Stevens continued. “In short, the CFPB’s influence on the financial services sector will be unprecedented, and MBA will continue to urge that appropriate institutional checks and balances be in place to ensure that the CFPB’s authority is used wisely and judiciously.”

Tom Donohue, President and CEO of the U.S. Chamber of Commerce, expressed his concerns about the Cordray recess appointment on his organization’s website.

“To say we are disappointed in the move by the president today would be a gross understatement,” Donohue wrote. “This controversial appointment is unprecedented, constitutionally questionable, and puts the authority of the director and the validity of the bureau’s work in legal jeopardy. What’s more, it ignores repeated calls to reform the bureau by restoring basic checks and balances. The Senate has already made it clear that structural changes are needed before a director can be confirmed, and the executive branch has defied convention to undermine that process. Today’s move by the President robs Congress of its one opportunity to provide a check on the CFPB’s broad and largely undefined reach.”

The U.S. Chamber of Commerce has no immediate plans to sue over the Cordray appointment. The American Financial Services Association had something much different to say. “I want to make it perfectly clear, we are not suing our regulator,” Bill Himpler, Executive Vice President for federal affairs at the American Financial Services Association, told an audience of bank lawyers on Tuesday. This trade group’s membership includes primarily non-bank installment and automotive lenders. During a panel discussion about the newly organized and highly empowered CFPB, Himpler offered some rare industry praise for the agency’s staff and for President Obama’s political instincts in appointing Cordray.

“I have to tip my hat to the president,” Himpler said. “This was a great political play. It plays to the themes he was running on,” primarily “cleaning up Wall Street.”
“There is a receptivity [by the CFPB] to learn and that’s very refreshing,” Himpler said. “They want to get it right so to a certain extent that creates a level of comfort, but there are other signals that still leave lingering heartburn.”

What happens next?
It has been pointed out by CIS legal and legislative advisors that, “… unless the appointment is successfully challenged, this recess appointment would open up a whole range of powers to the bureau, including the power to regulate non-bank players and the authority to act under the ‘unfair, deceptive, or abusive’ provisions in the Dodd-Frank Act.”

It has been determined by some that a constitutional challenge to the president’s recess appointment is indeed possible. However, just how would such a challenge come about? It seems unlikely that any of the large financial institutions regulated by the CFPB would undertake such a move, and one may suspect there would be political sensitivity to this issue from the major consumer financial services trade associations. It seems more likely that one or more members of the Senate might challenge the appointment in court. Or perhaps a smaller non-bank lender might be motivated to do so. Alternatively, a financial services trade association may wait and take aim once the CFPB has done something to impact an industry negatively. We will need to wait and see if the constitutional issues surrounding this appointment will be litigated, either in an offensive way in the near future, or later in time as a defensive measure by a target of the CFPB’s regulatory or enforcement efforts.

Given the rather controversial manner in which the president has appointed the director, some seem persuaded that the administration believes that its political goals are better served by taking a hard-line, confrontational stance with respect to the CFPB. If there is to be a political payoff to the administration from taking this risk, it would seem to require the CFPB to be visibly active in rulemaking and enforcement activity this year. Indeed, the official White House announcement of the appointment trumpets the president’s “decisive” action and states that “the American people will have a consumer watchdog fighting tooth and nail on their behalf.”

How Should the Reverse Mortgage Industry Respond?
In terms of a path forward, perhaps it would be wise for the industry to embrace the CFPB sooner rather than later.

There are some at CIS, for example, who believe that this is actually an opportunity for the industry to consider threading the needle with both the administration and Capitol Hill, viewing Cordray’s appointment as an opportunity for the industry rather than just another negative development. Why not embrace the CFPB and tout the reverse mortgage industry’s pro-consumer benefits? Why not point out the existing consumer safeguards already in place, such as federally mandated housing counseling and other protections? Why not consider sending a positive, nonpartisan message to Cordray and his team so we can continue to cultivate a productive relationship with both the executive branch and the legislative branch of the government?

Cordray voiced some encouraging words when addressing the U.S. Chamber of Commerce. “What I want to say to business is, they should embrace the bureau,” he said, adding, “Not only are we going to protect consumers but we are going to support the honest and responsible businesses in the financial marketplace from unscrupulous businesses who undercut them with impunity.”

Some other positive news is that in the last two weeks Director Cordray has reached out to about 100 people at banks, trade associations and consumer groups to make introductions and get feedback. Among those at the top of the banking food chain he has spoken with are Bank of America CEO Brian Moynihan, Citigroup CEO Vikram Pandit, JPMorgan Chase chief Jamie Dimon, US Bancorp CEO Richard Davis and PNC Financial Services Group’s James Rohr. Cordray has also spoken with leaders of consumer groups such as the Consumer Federation of America and Public Citizen, as well as trade groups like the American Bankers Association and the Consumer Bankers Association. It is important that Director Cordray reach out to the banks, as they are some of the most skeptical of the CFPB inside the financial services arena.

Some have speculated that the president will be counting on the CFPB director to demonstrate some “wins” during election season that illustrate the effectiveness and importance of the CFPB as an enforcer of consumer protections. I believe we can expect this to indeed be the case. I also anticipate that the CFPB will be motivated to move as quickly and as efficiently as possible.

Regardless of the partisan political thrashings likely to ensue, the CFPB is here to stay and as an industry we must deal with this new reality. In addition to cultivating a positive relationship with the CFPB we must put forth an effort to help it shape the best sort of public policy possible. Furthermore, the industry must continue its mission to secure support on Capitol Hill as our best insurance against any unfair or destructive regulation emerging on the horizon.

With more than 10,000 U.S. citizens turning 65 every 24 hours, the number of older Americans coming to rely on the reverse mortgage industry will steadily increase. It remains incumbent upon the industry to help protect, preserve and promote the financial independence of America’s seniors by making every effort to ensure that the industry itself remains a viable option.