Over the short term of Director Richard Cordray, the Consumer Financial Protection Bureau (CFPB) has confirmed almost all of the Republican Party’s deepest fears about the organization.
The CFPB has laid out rules that prohibited banks and other lenders from making loans that offer deceptive teaser rates or that require no documentation from the borrowers, and require lenders to make more of an effort to ensure that borrowers can repay their loans.
These rules, set to go into effect next January, also limit negative-amortization loans — which are loans in which the balance grows over time. Banks will not be prohibited from making such loans, but they will not be protected against borrowers’ lawsuits for taking such an action. Mortgage originators also will be restricted from charging excessive points and fees, from making loans with balloon payments and making loans that load a borrower with total payments in excess of 43 percent of the borrower’s income.
These rules are intended to legally and definitively separate “qualified” loans — which are immune from litigation — from “unqualified” loans. This immunity is thought to promote bank lending, which has been restricted under Frank-Dodd and has been slow to restart post-debt crisis.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Cordray said. “Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
The Republicans feel that this is obtrusive to the nature of capitalism and the free market. Despite praise from them in regard to Cordray’s qualifications and capabilities, the Republicans have stated explicitly that they will block the nomination of any candidate for director of the CFPB. The Republicans, in their protest of the CFPB, called for the establishment of a bipartisan board of directors for the CFPB, for subjecting the Bureau to an annual appropriation process and establishing a safety-and-soundness check for the regulators.
Fighting for the consumer
In October 2012, the CFPB ordered American Express (NYSE: AXP) to pay $85 million to approximately 250,000 customers for illegal practices. This was done as the result of a multi-part investigation that showed that at every stage of the consumer experience — from marketing to payment to debt collection — American Express, via its subsidiaries, violated consumer protection laws.
“Several American Express companies violated consumer protection laws and those laws were violated at all stages of the game – from the moment a consumer shopped for a card to the moment the consumer got a phone call about long overdue debt,” Cordray said. “[The enforcement action] require the American Express companies to fully refund about $85 million to consumers and it requires them to make specific changes in their business practices. The American Express companies will identify the harmed customers, notify them and make sure they get back their money.”
It was determined, in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Utah Department of Financial Institutions, that American Express subsidiaries deceived consumers who signed up for the American Express “Blue Sky” credit card, charged unlawful late fees and unlawfully discriminated against applicants on the basis of age. In addition, American Express failed to report consumer disputes to consumer reporting agencies and misled consumers about debt collection policies.
American Express was ordered to pay a civil fine of $27.5 million, offer all Blue Sky customers that were promised $300 with a new account the $300 the company denied them, reimbursement of all illegal late fees and a refund of any monies paid to settle old debts that were gain by misleading the customers with an additional $100 to all that were promised that their old debt will be forgiven, but weren’t.
The CFPB has also levied a fine of $2 million against Capital One for misleading information.
In December 2012, Payday Loan Debt Solution Inc., a Florida debt-relief company, was ordered to pay $100,000 in refunds to consumers. The company added up-front fees for its assistance in settling debts. The company was also fined $5,000. This investigation was done with the assistance of the state of Florida, and the CFPB had similar investigations in place with the attorney generals of New Mexico, North Carolina, North Dakota and Wisconsin.
On Feb. 1, Senate Minority Leader Mitch McConnell (R-Ky.) sent a letter to President Obama that was signed by 43 Republican senators, which read: “… we write to you to reaffirm our concerns over the transparency and accountability of the Consumer Financial Protection Bureau (CFPB) … we have serious concerns about the lack of congressional oversight of the agency and the lack of normal, democratic checks on its sole director, who would wield nearly unprecedented powers.”
This is almost an exact copy of a letter sent by the Senate Republican Caucus to the president in 2011.
In what many analysts view as a nullification attempt, the Republicans have blocked the nomination of a CFPB director since the creation of the bureau in 2010. Despite the fact that the Dodd-Frank Wall Street Reform and Consumer Protection Act was made law legitimately and that Dodd-Frank calls for the CFPB, the Republicans have became committed to making the organization and its sponsoring law unenforceable and irrelevant.
The Republicans’ past support of the big banks and Wall Street’s support of the Republicans in the last election cycle have pitted the Republicans against financial regulation. Oddly, though, the banks now favor the CFPB. David Stevens, chief executive for the Mortgage Bankers Association, told the Wall Street Journal, “We would be left with the vague definitions in Dodd-Frank, which would expose far greater risk to the financial-services industry” in regard to efforts to weaken the CFPB.
A slippery slope
Republicans are hoping that the federal appeals court ruling will help reverse the CFPB’s rulings over the last year. If the court’s ruling hold, it can be argued that the CFPB’s actions were illegal and invalid — as they were directed by someone that had no legal authority in the bureau — leading to discussions and litigation about a rollback of policy.
However, the upholding of such a ruling would make all recess appointments illegal for both Republican and Democratic presidential administrations, including George W. Bush’s appointment of John Bolton as United Nations ambassador. This could cause a great deal of collateral damage and open the federal government to lawsuits and policy challenges.
In addition, the one check the president has against a systematic blocking of all nominees for government agencies the minority party doesn’t like — such as what is currently happening with the NLRB, the CFPB and the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) — has been removed. This is extremely dangerous, as the minority party can — in theory — block all of a president’s nominees and functionally stop the federal government in an attempt to extort control.
The CFPB is a nominal but independent part of the Federal Reserve System. It is charged to “implement and, where applicable, enforce federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent and competitive.”
Even without a director, the CFPB can still write rules and issue orders in response to violations of consumer protection laws. However, it is believed that without direction, the CFPB will not have the teeth to aggressively enforce policy violation, similar to the posture the ATF assumes today.
Republican efforts to stop the CFPB
In 2011, President Obama nominated now-Senator Elizabeth Warren (D-Mass.) to the position of director, only to face a vow from the Republicans to filibuster the nomination. In January 2012, Obama made a recess nomination of former Ohio attorney general Richard Cordray to the directorate, of which Republicans cried foul. The president also made appointments to the National Labor Relations Board, where vacancies also were being blocked.
On Jan. 25, a federal appeals court ruled that the president’s appointments were illegal. While the president is allowed to make temporary appointments when the Senate is in recess, the Senate Republicans argued that — during the time — they were holding minutes-long “In pro forma sessions,” in which “no business [would be] conducted” per a consent agreement. As the Senate was “in session” at the time, the president was not eligible to make temporary appointments.
More pointedly, the court ruled to limit the scope of presidential temporary appointments. The court ruled that the appointment must be done between the annular recess between sessions and must be done only for vacancies that arise during the recess. While a Justice Department appeal is keeping Cordray in the director’s seat, it may not be long before the seat is vacant again.
The points that the Republicans made about the CFPB in its letter to the president are definitively wrong. The CFPB must regularly report to and appear before the Congress, must submit to possible veto from the Financial Stability Oversight Council (FSOC), is subjected to an annual audit by the Government Accounting Office (GAO) and is subject to the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).
The CFPB’s budget is statutorily capped (12 percent of the Federal Reserve’s budget; currently, $598 million), must consider the impact of proposed rules on small banks and credit unions, is subject to an independent private-sector audit, and is monitored by the Inspector General of the Federal Reserve Board of Governors. Finally, no regulatory board is part of the annual appropriation process; they all have their own independent budgets.
Giving the Congress control of appropriations would violate the bureau’s independence, and as the House is Republican-controlled and all finance bills start with the House, the bureau would be susceptible to defunding or influence from the right.
No set of government regulators must face as many checks and challenges as the CFPB. However, this reality does not silence Republicans’ opposition of the Bureau. On a basic level, they see it as being in opposition of the free market and banks’ right to do business freely.
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