Until the Senate confirms a director, the new Consumer Financial Protection Bureau cannot impose rules on some of the worst actors in the 2008 financial crisis: payday lenders and non-bank mortgage brokers.
A Tuesday confirmation hearing of Richard Cordray to lead the agency will be a "food fight" with Republicans reiterating their vow to block confirmation unless lawmakers scale back the bureau's power, predicted Karen Shaw Petrou, managing partner of Federal Financial Analytics, a research and advisory firm. But even if the White House is willing to compromise on the regulator's structure, which it's not, such a deal would never pass the sorely divided Congress, Petrou said.
In the meantime, the bureau cannot set rules for non-bank institutions that offer financial products to consumers, as outlined under the landmark Dodd-Frank Act that Congress passed last summer. The U.S. Chamber of Commerce has even challenged the CFPB's move this summer to collect input on how to structure a regulatory program for non-banks, such as check cashers, credit bureaus and private student lenders.
"This is the worst possible outcome, a big empty space where there's still a lot of urgent need," Petrou said. "It's an abdication of leadership on all sides to leave critical agencies without confirmed heads."
The private sector and its GOP allies in Congress object to the bureau's broad reach and structure, led by a single director instead of a bipartisan group like some other regulators. Forty-four Republican Senators have pledged to block the confirmation of any director unless the agency's power is curbed.
They also argue that the bureau violated the Dodd-Frank Act in taking preliminary steps to put together rules for non-banks before having a director in place. "We agree you need to have enhanced consumer protection," said Tom Quaadman, vice president of the Chamber's Center for Capital Markets. "The regulator, as with anyone, has to follow the provisions of the law."
Moreover, with the economy still struggling to emerge from recession, any move to restrict credit could harm small businesses, typically the engine of post-recession job growth, Quaadman said. The Chamber successfully sued to overturn a new Securities and Exchange Commission rule giving shareholders more power to nominate directors to publicly traded companies, and will be looking at other Dodd-Frank initiatives for possible legal challenges.
CFPB spokeswoman Jennifer Howard stressed the importance of getting the bureau up and running to protect consumers regardless of the company that sells them products.
"For the first time, the Wall Street Reform Act authorizes a federal agency to carefully monitor non-bank financial companies such as payday lenders, check cashers, money transmitters, credit bureaus, debt collectors, private student lenders, and mortgage lenders to make sure they are following the law," Howard said. "With consistent rules that apply across the marketplace, consumers receive strong protections regardless of whether they deal with a bank or a non-bank financial company."
The American Bankers Association, whose members compete with non-bank providers of financial products, supports the CFPB's inquiry into non-bank supervision, said Virginia O'Neill, senior counsel at ABA. "We have consistently sought a leveling of the playing field and had concerns about non-bank financial service providers whose business model isn't built on a long-term relationship with consumers," O'Neill said.
However, the group also supports the Republican efforts to pare back the CFPB's authority. "ABA is clearly concerned about the power, the unprecedented power this agency got. We think it's more important that those issues get resolved first," she said, noting that the Federal Trade Commission and state attorneys general retain authority to take enforcement action against non-bank institutions that are violating the law and trampling on consumers' rights.
But Lisa Donner, executive director of Americans for Financial Reform, pointed out that those existing enforcement powers failed to protect Americans from fraud and abuse to the tune of billions of dollars every year. "Reckless and deceptive behavior by irresponsible parties that included banks and non-banks, including mortgage companies, were fundamental causes of the financial crisis," Donner said.
The financial crisis stemmed from the prevalence of risky mortgage products and loans made with minimal or no supporting documentation, which were repackaged and sold to investors. When the financial markets became shaky, investors lost confidence in the multi-trillion dollar housing finance market and the real estate bubble popped. That triggered a string of near-failures of major financial firms and led to a government bailout and recession that the country is still struggling to overcome.
Cordray, an attorney currently serving as the CFPB's enforcement chief, previously held positions as Ohio's attorney general and state treasurer. "It's striking how loud and how widespread the support for Rich Cordray has been, especially in Ohio from the folks who know him the best," she said. "He's got a record of standing up for consumers and of being fair and effective."
