President Obama on Sunday at last named his choice to lead the new consumer watchdog agency created by Congress in sweeping financial reforms a year ago.
The nominee’s chances of being approved by the Senate, however, are about as good as the chances of a blizzard in Alabama this weekend, say Washington insiders.
It’s nothing against the man himself, former Ohio attorney general and five-time “Jeopardy!” champ Richard Cordray. Rather, it’s Republicans’ concerns about the entire agency, called the Consumer Financial Protection Bureau (CFPB). They say its organization runs counter to the constitutional principles of checks and balances and argue it is “one of the least accountable and most powerful agencies in Washington.”
Until President Obama addresses their concerns, Republicans have vowed to block the appointment of a director. The bureau is scheduled officially to open Thursday.
“There is a lot of bad blood between congressional Republicans the bureau over enforcing the [financial reform] Dodd-Frank Act even before they officially open their doors,” says consultant Pete Davis of Davis Capital Investment Ideas, and a former congressional staffer.
The goal of the bureau is to act on behalf of consumers, enforcing consumer-oriented laws that affect banks, mortgage companies, and other lenders, as well as investigating consumer complaints against the financial industry.
But in May, 44 Republican senators signed a letter saying they would block any appointment to head the bureau unless the Congress and president make far-reaching changes to its structure and funding. The Republicans have three main objections:
A single person is responsible for CFPB’s operations. Republicans want a board to oversee the bureau.
The CFPB gets its funding from the Federal Reserve and does not need approval from any congressional committee. Republicans want Congress to have direct oversight over the bureau’s finances.
The bureau has broad rule-making ability. Republicans are concerned that rules established by the new agency would cause banks to fail.
“The bureau, as currently structured, lacks any semblance of the checks and balances inherent in the Constitution,” wrote Sen. Richard Shelby (R) of Alabama, the top Republican on the Committee on Banking, House and Urban Affairs.
However, consumer groups say the changes demanded by the Republican senators would result in a weak and timid agency.
“Several key senators want to reopen negotiations on a law that passed Congress last year, and the president won’t allow it,” says Travis Plunkett, legislative director of the Consumer Federation of America, a lobbying and watchdog group in Washington.
After Congress voted on the Dodd-Frank bill, many people thought Obama would appoint Harvard professor Elizabeth Warren to run the bureau. She was instrumental in creating the bureau and has hired many of its managers.
Since the Republican senators could block her appointment, the Obama administration decided to wait until Congress went on recess so Obama could make her a “recess appointment,” who would run the Bureau until the end of the year. But the Senate has not recessed. Instead, Ms. Warren has unofficially run the bureau.
“The question is do [the Republicans] finally relent at some point?” asks Mr. Davis of Davis Capital Investment Ideas.
He expects Mr. Cordray will face the same situation as Warren has – running the bureau unofficially.
Former colleagues describe Cordray as intelligent and reasonable, with a focus on finding practical solutions to policy issues. During the two years Cordray served as Ohio’s attorney general, his office brought several cases against major Wall Street firms – including AIG, which reached a $725 million class-action settlement with Cordray’s office in 2010.
“He is brilliant and has balanced judgment,” says Nancy Rogers, who preceded Cordray as Ohio’s attorney general, in an e-mail. “I believe that he will listen carefully and thoughtfully when he assumes this major new responsibility for our nation, and that he will make decisions based on rigorous analysis of the issues.”
In all his work, Cordray is driven by details, not dogma, adds Bill Faith, executive director of the Coalition of Homelessness and Housing in Ohio, who has known Cordray for 20 years.
“He’s not some ideologue consumer advocate,” says Mr. Faith, who recalls answering detailed questions that Cordray would ask him on housing and consumer issues.
Faith says Cordray only used litigation as a last resort. “It was really only after years of pursuing every other strategy that Rich Cordray ever filed his first lawsuit against the financial-services industry,” says Faith.
One of the first items on the agenda for Cordray is to amend the financial-disclosure forms that people receive when they look for a loan to buy a house.
“The watchword is transparency,” says Mr. Plunkett of the Consumer Federation of America. “They are really reinventing the pile of papers most people get when shopping for mortgage loans.”
However, Mark Calabria, director of financial-regulation studies at the Cato Institute, a libertarian think tank in Washington, worries that the CPFB will make the documents worse. For example, he says consumers don’t really care how much each fax is going to cost, only what the bottom line is. “What you really need to know is what is the total cost, what is the interest rate,” he says.
The new bureau is also expected to start the process of regulating non-banks such as mortgage lenders, credit bureaus, and firms that make so-called payday loans (high-cost loans that get someone through to their next payday).
“Every state pretty much regulates the non-banks already,” says Mr. Calabria, who is concerned that the legislation could lead to taxpayers having to rescue a non-bank.
However, Plunkett points out that many of these organizations were deeply involved in the 2008 financial meltdown by getting poor people to sign up for mortgages they ultimately could not afford.
Plunkett says Cordray can get to work on most of these efforts. But, he notes, there are some new powers that can’t be enacted until there is an actual director, such as overseeing non-banks.
“It’s not a big deal now when they are just getting going, but shortly it will be a big deal,” he says.