The New Cop on the Bank Regulatory Beat

In March of this year, Richard Cordray, the boyish looking director of the Consumer Financial Protection Bureau, traveled to Nashville to give a speech at the national convention of the Independent Community Bankers of America. Cordray was no doubt eager to make a good impression since his agency has been lambasted by Republicans in the U.S. Congress, and by bankers across the country (including his hosts that day), as an egregious example of regulatory overkill.

Cordray, a Democrat who ran several times for statewide office in his native Ohio, opened on a conciliatory note that bordered on pandering when he spent several minutes extolling the virtues of community banks, dishing out the kind of effusive praise that would make even a politician blush. “You are the true community leaders!” he gushed at one point.

And then he offered his audience of small town bankers a big dose of cod liver oil by saying, in effect, that stricter consumer protection regulation was actually good for them. Cordray argued that while community banks did not cause the 2008 financial crisis-that debacle was more the fault of unregulated financial companies whose excesses contributed to the collapse of the U.S. mortgage market-they would benefit from the level playing field that tougher regulation by the Consumer Financial Protection Bureau (CFPB) would create.

“We want all financial institutions, all of your competitors, to have the same kind of accountability that community bankers face every day,” Cordray said. “And we want to protect you from the pressures that an unregulated market can put on you to adopt practices that make profits by hiding costs and risks to consumers.”

It’s debatable whether most bankers think that strict supervision of nonbanks in return for additional supervision of them is much of a bargain. If they didn’t cause the problem, why must they become part of the solution? Bankers are inclined to be pretty wary of Cordray and the CFPB-and they should be, because Cordray, a former Ohio attorney general who once sued Bank of America Corp. over its acquisition of Merrill Lynch & Co.-is the top cop of a new, independent regulatory agency that has been given broad authority to write rules for the personal financial services marketplace, and to regulate market conduct. It would be nau00efve to think that over time the CFPB won’t have an enormous impact on how the nation’s banks design and market their consumer products.

“They have a broad mandate and will use it,” says John Dugan, a partner at Covington & Burling LLC in Washington, D.C., and the comptroller of the currency from 2006 to 2011.

Since it became operational in July 2011, Cordray and his senior staff have made a visible effort to reach out and engage the banking industry, as evidenced by his Nashville speech. (The bureau did not respond to requests by Bank Director magazine to interview Cordray.) The early reviews have been cautiously upbeat. Steve Bartlett, president and chief executive officer of the Financial Services Roundtable, a Washington, D.C.-based trade group that represents large financial services companies including many of the country’s biggest banks, says that the CFPB under Cordray “has been respectful, transparent and easy to work with.”

“They have a staff of very bright, very confident, energetic people who obviously believe in the mission of financial protection for consumers,” says Richard Riese, senior vice president for the American Bankers Association’s Center for Regulatory Compliance in Washington, D.C. “They express an interest in making markets work. They have made every effort to reach out and involve banks and get their input in the process.”

Supporters of the CFPB make the argument that stronger and more consistent regulation of the personal financial services market benefits everyone. “We absolutely need the CFPB,” says Lauren Saunders, managing attorney at the National Consumer Law Center in Washington, D.C. “I think that strong consumer protection protects everyone-consumers, banks and the economy.”

North Carolina Attorney General Roy Cooper echoes Saunders sentiments. “I think it’s a positive step for consumers and for banks,” he says. “There were many entities that were selling products to consumers that were essentially unregulated. [The bureau] will make sure that the playing field is level for consumers and for competitors.”

And yet the CFPB is something of an inkblot upon which people can project their greatest hopes-or fears-because it is still so new, and so much about it is unknown. “This is an agency with a strong sense of mission, but I think its personality is still emerging,” says Ann Jaedicke, a managing director at Washington, D.C.-based Promontory Financial Group LLC and a former deputy comptroller at the Office of the Comptroller of the Currency (OCC). Brian Gardner, senior vice president of Washington research at Keefe Bruyette & Woods Inc., says Cordray and other members of his senior staff stick to a “very tightly scripted message” that makes it difficult to get a fix on how the CFPB will use its authority. “It’s very tough to say how it will operate,” he says. “There’s no history.”

Indeed, what bankers should worry about most is how much they don’t know about the CFPB. What kind of regulator will it turn out to be? From the banking industry’s perspective, will it be a good cop-or a bad cop? “The thing I always worry about with any government entity is accountability,” says Steve Trager, chairman and CEO of Louisville, Kentucky-based Republic Bancorp. “Will we have a politically driven [and] subjective rule maker without any balance or accountability?”

The financial crisis was, of course, the divine spark that led to the bureau’s creation in 2010 as a centerpiece of the Dodd-Frank Act, the landmark post-crisis legislation that was hammered out by a Democratic controlled Congress, and signed into law by a Democratic president, over the strong objections of many Congressional Republicans. Dodd-Frank launched a massive overhaul of the U.S. financial system that includes everything from higher minimum capital requirements for banks and tougher restrictions on loan sales for securitization, to new rules for winding down bankrupt financial companies and oversight of the credit rating agencies. And yet for all its breadth and depth, it’s not an exaggeration to say that creation of a federal consumer advocate with unprecedented authority to police the marketplace could end up being Dodd-Frank’s most enduring legacy.

While the CFPB is a progeny of the mortgage meltdown, and a judgment by a majority in Congress and the Obama Administration that the mortgage industry needed a more effective regulatory structure, its portfolio is much broader than that. As defined by Dodd-Frank, the bureau’s mission is to regulate “consumer financial products and services,” including loan origination, brokering and servicing, real estate appraisal, deposit taking and the transmission of funds, check cashing, payment instruments like stored value cards, financial advisory services, consumer credit reports and consumer debt collection.

The bureau has direct supervisory authority for consumer compliance at banks over $10 billion in assets, as well as their subsidiaries, and that includes the ability to conduct on-site examinations. The Federal Deposit Insurance Corp. (FDIC) and the OCC retain the authority to oversee consumer compliance at state- and national-chartered banks, respectively, that are under $10 billion in assets-although the CFPB does have the discretion to participate in a sampling of regular FDIC and OCC examinations of the smaller institutions, and also may require them to provide it with reports on consumer-related products and activities. In addition to large banks, the bureau has examination authority over several categories of nonbank financial companies including mortgage originators, brokers and loan servicers, educational lenders and payday lenders.

The CFPB’s greatest long-term impact might actually come from its broad rule-making authority, including the assumption of a number of federal consumer statutes-the Truth in Lending Act, the Real Estate Settlement Act and Home Mortgage Disclosure Act, to name just three- that were transferred to it under Dodd-Frank. That reform law also tasked it with the responsibility to develop minimum standards for residential mortgages, including the requirement that lenders verify the borrower’s ability to repay-a provision that will most likely kill off mortgages that do not require income verification-often referred to as “liar loans” during the mid-2000s mortgage boom. And the bureau was granted the authority under Dodd-Frank to write new rules for the prohibition of “unfair, deceptive and abusive practices.” Depending on how those terms are defined by the bureau, this could have a far reaching impact on the entire financial services marketplace for product design, marketing and distribution.

Lastly, the bureau has authority to bring civil actions in its own name, and also to refer criminal cases to the U.S. Department of Justice for prosecution.

Although it is officially housed within the Federal Reserve, the CFPB is an independent agency with its own budget and little oversight from the Fed’s Board of Governors. It is led by a director who is appointed by the president and serves a five-year term. The director must appear semi-annually before both houses of Congress, although that body has no effective control over the bureau or its policies.

The 52-year-old Cordray was selected in July 2011 by President Barack Obama to become the CFPB’s first director, although he probably was not the person most industry observers expected to get the job: That would have been Harvard University law professor Elizabeth Warren, who as an assistant to the president oversaw the bureau’s launching. Warren, who subsequently left the CFPB to run for the U.S. Senate in Massachusetts, has a well-deserved reputation as a strong consumer advocate, and had long sought the creation of a watchdog agency for consumer financial services.

Cordray might have brought a lower profile to his new position than Warren would have, but the banking industry has every reason to take him just as seriously. As Ohio attorney general, he sued Bank of America over its 2008 acquisition of Merrill Lynch on behalf of several of the state’s large public employee pension funds. The suit alleged that Bank of America concealed billions of dollars in losses at Merrill from shareholders prior to the deal being announced, and was settled in 2009 for a reported $475 million. And in 2010, Cordray also won a reported $750 million settlement on a securities fraud class action suit filed against insurance giant American International Group Inc.

Invariably described as being very smart, Cordray has a master’s degree in economics from Oxford University and a law degree from the University of Chicago, where he was editor-in-chief of the University of Chicago Law Review. He also was a five time champion on the TV show “Jeopardy!” in the late 1980s and won a total of $45,303 in prize money from the popular game show.

Cordray brings considerable political experience to his new job as well. He was elected to the U.S. House of Representatives in 1990, but lost his reelection bid two years later when his Ohio district was redrawn. He would make several other runs at statewide office only to fall short, including a failed run at the U.S. Senate in 2000, before he was elected the state’s attorney general in 2008. While Cordray might be political, he apparently isn’t partisan. Several Ohio Republicans have voiced their public support of his selection to run the bureau, including former Ohio Supreme Court Justice Andy Douglas, who earlier this year told the Associated Press: “If we really profess that we want the brightest and the best in public service, then he is that. And to not jump at the chance to have people like that in public service is a political shortcoming that I see governing us that’s opposed to good sense.”

Cordray has worked hard to win over Senate Republicans, but that did not prevent them from blocking his confirmation because of their concern that an independent regulatory agency led by a single director would have too much power. Led by Sen. Richard Shelby, the ranking member of the Senate Committee on Banking, Housing and Urban Affairs, the Republicans have sought the creation of an executive board similar to what exists at the FDIC and Securities and Exchange Commission, and had vowed to oppose the confirmation of a permanent CFPB director until that change was made.

Obama finally broke the logjam in January when he installed Cordray as the director using a controversial recess appointment. (The president has the authority to make appointments that require Senate confirmation if they are made when Congress is in recess.) This was key, from the administration’s point of view, because Dodd-Frank stipulates that the bureau could not assume its authority over nonbank companies until a permanent director had been confirmed by the Senate.

Republican opposition to the CFPB’s governance structure has received widespread support throughout the banking and financial services industry. “The biggest issue we have [with the CFPB] is the structure of a sole director,” says Bartlett at the Financial Services Roundtable, who still favors a five-member board.

Cordray’s recess appointment was only a temporary solution since it will run out on January 3, 2013, when the current Congress expires. Of course, this will also be after the next presidential election-and there is a possibility that the Republicans might capture the Senate, the White House or both, which could result in a leadership vacuum at the CFPB sometime in 2013, since it’s doubtful that Cordray would survive in that scenario. The battle over the bureau’s governance structure is at an impasse, and according to Bartlett, “the impasse will be settled by the election.”

Perhaps, and perhaps not. It’s also conceivable that Obama will win reelection and the Democrats will retain their narrow control of the Senate, in which case Cordray’s recess appointment will still expire and the White House will be back to square one.

Another challenge to Cordray’s recess appointment could come in the courts. Senate Republicans objected to the appointment in part because they questioned its constitutionality. The Senate technically was in not recess last January when the appointment was made even though most senators had left Washington and no business was being conducted. As yet, no banks or banking trade associations have challenged Cordray’s appointment in court, and KBW’s Gardner doubts that any will. “I think it’s unlikely that it will be sued by any banking entities,” he says. “No one wants to sue their regulator.”

However, it might be a different story for nonbank financial institutions that now fall under the CFPB’s domain. Under the language of Dodd-Frank, the CFPB is authorized to supervise banks over $10 billion in assets even if it doesn’t have a director in place that has been confirmed by the Senate. It’s a different story on the nonbank side, since under Dodd-Frank the CFPB could not begin to discharge its authority over nonbanks until a director was in place. A successful legal challenge to the constitutionality of Cordray’s recess appointment would also call into question the legality of any actions the CFPB has taken in the nonbank sector, which might tempt one of those companies to sue-especially if it thought the bureau was contemplating some kind of enforcement action.

Since it became operational last fall, the bureau has pushed forward with its consumer protection mandate on all fronts. It launched its bank supervision program for institutions over $10 billion in assets in July 2011, and recently began an inquiry into bank overdraft protection practices. The CFPB began to exercise its supervision of nonbanks shortly after Cordray’s appointment in January, and since then has focused on mortgage servicers, payday lenders, student lenders and debt collection and consumer reporting firms.

In a recent C-SPAN interview, Cordray said that “we do have open matters we’re looking at involving a range of institutions-large banks, smaller banks and nonbanks,” and it’s not unlikely that the bureau will announce a big enforcement action soon. “It’s nine months later and there’s still no enforcement case,” the ABA’s Riese said in mid-March. “I doubt they’ll get to 12 months without one.”

Dugan, the former comptroller, agrees. “I’m sure they’re going to do some enforcement action just to show they’re on the beat,” he says.

There are still a number of important questions that might take a few years yet to answer, and they will go a long way toward defining the CFPB’s personality. For example, how will the bureau use its enforcement authority against banks? Bartlett says the bureau has established a practice of bringing its enforcement lawyers when its examiners visit an institution. According to Bartlett, the bureau says it’s only trying to train its enforcement lawyers on what kinds of violations to look for, and it’s not intended as a hostile act. But as Bartlett wryly puts it, bringing an enforcement lawyer into the room “has a way of shutting down the conversation.” He believes that oversight works best when regulators try to settle issues at the supervisory level first and only resort to formal enforcement actions when that approach fails. And the fact that as a former state attorney general, Cordray comes from the enforcement world only magnifies the concern. “Can he learn to be a supervisor rather than an enforcement agent?” Bartlett wonders.

It will also be interesting to watch how well the bureau works with the prudential agencies, both in its rule-making capacity and in its supervisory role for large banks. Prudential regulators like the FDIC and OCC are focused on safety and soundness issues-with the institution as their core concern-while the CFPB is focused primarily on the individual consumer, and there might be times when their differing priorities will bring them into conflict. The bureau is not required under Dodd-Frank to take safety and soundness issues into consideration when it writes rules for consumer compliance. Dugan was heading up the OCC when Dodd-Frank was being deliberated in Congress, and he was one of many who argued for a more collaborative approach to rule making. “I was always an advocate that [prudential agencies] should have more input into the rules that the bureau writes, and that was rejected,” he says.

And of particular concern to community banks is how the CFPB will impact them. It will, of course, be writing rules for the entire industry and won’t necessarily exempt smaller institutions from those provisions, although Cordray has promised to be sensitive to their concerns. “We know that one size does not fit all,” he told the ICBA bankers. “Where it makes sense to treat community banks differently from larger institutions, we have pledged to consider doing so.” That sounds reassuring, but an industry that has seen its compliance burden grow exponentially in just the last few years has every reason to be skeptical when any regulator pledges not to over-regulate.

“Whether or not [a new rule] applies directly to community banks is irrelevant because federal banking agencies don’t want to be called on the carpet for being soft on banks,” says Walt Moeling, a partner at Bryan Cave LLP in Atlanta. The banking agencies retain their authority for consumer compliance at institutions below the $10 billion threshold, but even here the CFPB’s presence is being felt. Moeling says FDIC and OCC consumer compliance examinations for banks below $10 billion are just as strenuous as those the CFPB are administering at large banks. “They’re being as tough on the small banks as the CFPB is being on big ones,” he says. “I don’t think you would get any of these agencies to admit that, but we’re seeing it in the field.”

The biggest question of all might be whether the CFPB survives a Republican takeover of Washington this fall, should that occur. Old Washington hands like Dugan discount the possibility that Dodd-Frank could be repealed, even if the Republicans do recapture the White House, because the Democrats would most surely put up a stiff resistance. “The Republicans control the House and they can’t get a bill through,” he says. Besides, adds Dugan, “You tell me the last time an agency was killed overnight. It took two banking crises to finally kill the Office of Thrift Supervision.”

Still, it’s possible that the CFPB could have its wings clipped-particularly if Cordray’s appointment expires and a Republican president declines to nominate a successor. “It’s hard to imagine the bureau being totally eliminated, but it’s easy to imagine it being severely weakened,” says Saunders at the National Consumer Law Center.

But that’s pure speculation at this point-and from the perspective of many bankers, wishful thinking.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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