Richard Cordray’s appointment as director of the U.S. Consumer Financial Protection Bureau moves the new agency nearer to fulfilling its intended role as a one-stop shop for borrower safeguards.
Unlike the historically patchwork oversight of consumer finance, the bureau centralizes the federal government’s authority and in some cases extends it. Consumers may benefit from its reach whenever they take out a payday loan, negotiate a mortgage rate, borrow money for school or pay a credit card fee. For those who think they’ve been wronged, there will be a complaint system to help them fight back.
Cordray, 52, who was seated by President Barack Obama on Jan. 4 over Republican objections, takes over a bureau created under the Dodd-Frank Act in response to complaints that existing regulators didn’t do enough to protect consumers before the 2008 credit crisis. The rules overhaul shifted consumer protection from regulators responsible for banks’ financial stability, removing a potential source of conflict.
“Consumers deserve to have someone who will stand on their side, who will protect them against fraud, and who will ensure they are treated fairly in the financial marketplace,” Cordray said yesterday in a Washington speech. “The new consumer bureau was created to make sure these things are achieved for all Americans.”
Obama lauded the agency today as the way “to make sure the rules of the road are enforced” on behalf of consumers. “You’ve finally got a great director who was tailor-made to lead this agency in Richard Cordray,” Obama said during a visit with bureau staff in Washington.
Elizabeth Warren, the Harvard Law School professor credited by Obama with conceiving the bureau, viewed it as a “cop on the beat” to protect Americans against unscrupulous lenders by -- among other things -- eliminating jargon-filled loan documents in favor of plain-English paperwork.
“It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house,” Warren wrote in the journal Democracy in 2007. “But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street -- and the mortgage won’t even carry a disclosure of that fact to the homeowner.”
The consumer bureau was envisioned as a bulwark against the kind of credit bubble that inflated from 1999 to 2007, when household debt tripled to more than $12 trillion, according to the agency.
Warren said effective federal consumer protection might have kept banks from improperly foreclosing on homes after the collapse of the U.S. mortgage market. The 14 largest mortgage servicers entered a consent decree with the Office of the Comptroller of the Currency that cost JPMorgan Chase & Co. $1.1 billion. Consumer protection rules might also have prevented the rise of so-called liar loans, mortgages that were given to borrowers without documented evidence of ability to repay, advocates for the bureau said.
The bureau’s creators also foresaw an agency that would replace inconsistent state regulation with more stringent federal rules on short-term, small-dollar lenders including payday firms, whose annual interest rates can top 400 percent.
The agency, which Warren shaped while serving as an Obama adviser, was churning out drafts of a model mortgage disclosure form as part of an initiative dubbed “Know Before You Owe” even before it officially began work on July 21. These forms are intended to help consumers understand the costs of a mortgage and shop around for the best deal.
Similar initiatives have been announced for credit cards and student loans, the other two leading types of consumer credit in the U.S.
The bureau’s direct supervision of mortgage servicers, payday lenders and private student-loan companies will give consumers a watchdog to protect their interests in dealings with nonbank firms “that often compete with banks but have largely escaped meaningful federal oversight,” Cordray said yesterday in a speech at the Brookings Institution in Washington.
“This is an important step forward for protecting consumers,” Cordray said in a statement on the bureau’s website. “Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market.” The speech was Cordray’s first since Obama used a recess appointment to give him the top job.
Republican lawmakers are questioning the legality of the move. Senator Charles Grassley of Iowa, the top Republican on the Judiciary Committee, asked the Department of Justice for information on the appointment in a letter signed by seven other Senate members.
Representative Spencer Bachus of Alabama, the chairman of the House Financial Services Committee, has begun an inquiry into the appointment. He has requested from Attorney General Eric Holder any information on the Justice Department’s role, as well as its opinion on the legal basis for the decision.
“The rule of law and Congress’ constitutionally grounded authority to conduct oversight of the executive branch requires that the administration explain the basis for its actions,” Bachus wrote to Holder in a letter dated today.
Cordray, a Democrat who served as Ohio’s attorney general, was tapped by Warren to run the bureau’s enforcement arm a month after he lost a re-election bid in November 2010. Cordray had previously served as Ohio’s treasurer, a state representative and as a law clerk to the U.S. Supreme Court, and has personally argued seven cases before the high court, according to his official biography. He was also a five-time winner on the television quiz show “Jeopardy.”
Congressional Republicans opposed the creation of the consumer bureau during negotiations that led to enactment of Dodd-Frank in 2010. Senate Republicans last year vowed to block confirmation of any director nominee while seeking changes including replacing the top job with a five-member commission and subjecting the bureau’s budget to the congressional appropriations process.
Senator Richard Shelby of Alabama led a group of 45 Republicans who vowed to deny Obama the 60 votes needed to ensure confirmation by the 100-member Senate. He released a statement Jan. 4 faulting Obama for bypassing lawmakers with an “end run” to seat “an unaccountable bureaucrat who will have immense power over the economy.”
Lobby groups representing financial firms including JPMorgan and Bank of America Corp. fought against the creation of an independent consumer bureau, saying it would create needless bureaucracy. Payday lenders like Advance America Cash Advance Centers Inc. won a rule preventing the agency from limiting interest rates, but couldn’t avoid being covered by its rules.
“It has been widely reported that we were against the creation of a Consumer Financial Protection Bureau (C.F.P.B.),” JPMorgan Chairman and Chief Executive Officer Jamie Dimon wrote in an April 4 letter to shareholders. “We were not -- we were against the creation of a standalone C.F.P.B., operating separately and apart from whatever regulatory agency already had oversight authority over banks.”
Consumers may benefit from the bureau’s complaint system, its coming regulations and the corps of examiners it is building to examine the books and practices of financial firms.
The bureau, which began taking complaints about credit cards on July 21, said it had fielded 5,074 inquiries as of Oct. 21. The bureau said it would make complaint information available -- without personal information -- to the public, bucking objections from credit card issuers.
“The complaint system has identified recurring scams and helped to obtain redress for defrauded consumers,” the bureau said in a Nov. 30 report.
Supervision of financial services firms could turn out to be a tactic for reducing the fees that consumers pay for overdrawing their checking account. A study by the Federal Deposit Insurance Corp. published in 2008 concluded that 9 percent of customers paid 84 percent of all overdraft fees.
Felt, Not Seen
Jo Ann Barefoot, a consultant with Treliant Risk Advisors in Washington, said the key tactic in reducing overdraft fees could be supervision, work that would be felt, but not seen, by consumers.
Traditionally, banking supervisors visit firms and examine their records, and prompt changes “every day of the week,” Barefoot said.
“Now for the first time, an agency is conducting examinations with a focus on harm to the consumer,” Barefoot said in an interview.
The existence of a new consumer bureau doesn’t mean that every mortgage will be refinanced, or every bad debt forgiven, Travis Plunkett, director of legislative affairs for the Consumer Federation of America, said in an interview.
“Americans have a right to expect that this new agency will start to address some of the financial problems that are affecting them,” Plunkett said. “That does not mean a startup agency can work miracles.”
The agency begins its work in earnest with a structure that will be largely invisible to the consumer.
Behind its website, consumerfinance.gov, lies the complaint system -- which can also be accessed by mail or telephone. Apart from the team that tends to that system, examiners will handle the day-to-day scrutiny of banks and other consumer finance companies.
Alleged lawbreakers will face its enforcement team, which Cordray set up over the past year. And a research and regulations team will both track industry developments, and write and revise the rules of the road for consumer finance.