What Will Cordray Do at the CFPB?

The January 4th recess appointment of Richard Cordray as the director at the Consumer Financial Protection Bureau prompted a substantial controversy because the Senate was not actually in recess. Given the important discussions of the substantive legal and political implications of the appointment, less attention has been paid to the policy implications that Cordray’s appointment may have on new regulatory, supervisory, and enforcement responsibilities in 2012.

While the CFPB was formally established under Dodd-Frank, the bureau has not been able to create new regulations or supervise non-bank financial institutions without a formally installed director. With a director in place, the bureau is now focused on setting and carrying out its full agenda. So what will the agenda be, and what signal to the market does his appointment send?

Nonbank Financial Institutions

Just days into his new job, Cordrary spoke at the Brookings Institute about his CFPB agenda regarding nonbank financial institutions including private mortgage lenders, credit unions, and payday lenders. The former Ohio state treasurer and attorney general remarked: “Many subprime loans during the housing bubble were made by nonbank mortgage brokers. Since most of these businesses are not used to any federal oversight, our new supervision program may be a challenge for them. But we must establish clear standards of conduct so that all financial providers play by the rules.” His full remarks are worth watching, but the key takeaway appears to be that one of Cordray’s top priorities will be to look at nonbank lenders who operate (or operated) in the subprime space.

Here is an excerpt from a blog post on the CFPB website from January 5th – under the subheading, “The Big Picture for the Nonbank Supervision Program”:

The CFPB’s supervision program for very large banks, thrifts, and credit unions – those with assets of over $10 billion – began operations on July 21, 2011. The CFPB’s nonbank supervision will now begin in phases. Effective immediately, the CFPB has authority to oversee nonbank businesses, regardless of size, in certain markets: mortgage companies (originators, brokers, and servicers, and loan modification or foreclosure relief services); payday lenders; and private education lenders.

For all other markets – such as debt collection, consumer reporting, auto financing, and money services businesses – the CFPB may supervise “larger participants” after defining what “larger participant” means. We already have taken important first steps to develop a “larger participant” rule – that is, we asked for public feedback on developing a rule. So far, we’ve received thousands of public comments and have met with trade groups, consumer and civil rights groups, and various state and federal regulators to get their input.

Based on their feedback, we have been hard at work preparing an initial “larger participant” rule. We will issue a proposed initial rule very soon.

So, until the CFPB finalizes a rule defining what constitutes a larger participant, it appears that the CFPB’s nonbank focus will be on mortgage companies, payday lenders, and private education lenders.

Enforcement and the Prospect of a Global Settlement

The same CFPB blog post also included this excerpt on the interplay between state and federal responsibilities:

Consistent with the Dodd-Frank Act, the CFPB is implementing a risk-based nonbank supervision program. On an ongoing basis, we will be assessing the risks posed to consumers in the relevant product markets. When considering whether and how to supervise particular nonbanks, we will consider several relevant factors, including the nonbank’s volume of business, types of products or services, and the extent of state oversight.

The CFPB will coordinate with other federal and state regulators. This coordination will help us allocate resources where they are most needed and minimize burdens on the nonbanks.

Cordray’s experience as the Ohio AG put him directly at the intersection of federal and state oversight across the consumer financial protection spectrum. (Note: the head of enforcement at the CFPB is also is a former Ohio colleague in the legal sphere.) Cordray also has experience striking rather large post financial crisis settlements at the state level, including with Bank of America and AIG ($475 million and $750 million respectively). This has led some to speculate whether Cordray will get back involved in the ongoing national settlement discussions regarding most state and federal investigations of alleged foreclosure improprieties. There were rumors that a pact with most – but probably not all – state AGs could be reached by Christmas. Now some are speculating that the Administration would like to see an agreement by the State of the Union address later this month. Then again, a near-deal on the settlement has been predicted so many times over the last year that perhaps there is still time for Cordray to get back involved.

Centralizing Power Structure

Cordray will be the lone source of power atop the CFPB, since the newly formed agency does not have a board of directors like the FDIC or the Federal Reserve. After all, it was the CFPB’s structure which led Senate Republicans, like Sen. Richard Shelby in this WSJ editorial, to oppose the regular-order appointment of Cordray to the CFPB. In this letter to Cordray requesting his testimony at a January 24th hearing, House Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs, Chairman McHenry echoes some of Senator Shelby’s concerns regarding the amount of power now held by Cordray and the limited amount of Congressional oversight for the bureau.

This hearing in a couple of weeks should be very interesting. It will probably be the first time that Cordray is pressed to present his full agenda and take questions. Given his past success with both prosecutions and settlements – and the fact this is an election year – it looks like the stars might be aligning for a big year of announcements on nonbank supervisory and enforcement actions.

UPDATE (1/12/12): The CFPB released its mortgage origination examination procedures shortly after the publishing of this post. Read them here.