With director, CFPB hits the ground running

Even after its July 2011 launch, the new federal Consumer Financial Protection Bureau couldn't fulfill all its duties without a director in place. Now that it has one - after President Obama's controversial recess-appointment Wednesday of former Ohio attorney general Richard Cordray - the CFPB is wasting no time.

This morning, the new agency announced plans to supervise nonbank financial institutions, such as mortgage brokers and payday lenders, in ways similar to the supervision that banking regulators have long used to supervise traditional banks.  In case anyone's forgotten, nonbank financial institutions played a key role in precipitating the 2008 financial crisis.

In a statement, Cordray called the plan "an important step forward for protecting consumers. Holding both banks and nonbanks accountable to consumer financial laws will help create a fairer, more transparent market for consumers. It will create a better environment for the honest businesses that serve them. And it will help the overall economic stability of our country.”

Here's how the CFPB described the scope of its nonbank supervision program:

A “nonbank” – or non-depository business – is a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include companies such as mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors, and money services companies.

There are thousands of nonbanks, with products that form a significant portion of the consumer financial marketplace and affect millions of Americans each year. The size and scope of nonbanks vary based on products. For example, according to studies and industry sources, nearly 20 million consumers use payday loans, roughly 200 million Americans rely on credit reporting agencies to report their credit histories accurately, 14 percent of consumers have one or more debts in collections, and nonbank lenders originated almost 2 million new mortgages in 2010.

Prior to passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law that created the CFPB, there was no federal program to supervise nonbanks. Other federal regulators examined banks, credit unions, and thrifts to make sure they were complying with the law, but generally the primary tool used to address issues with nonbanks was “after-the-fact” law enforcement.

Under the law, the CFPB now has the authority to oversee nonbanks, regardless of size, in certain specific markets: mortgage companies (originators, brokers, and servicers including loan modification or foreclosure relief services); payday lenders; and private education lenders.

For other markets, the CFPB can also supervise the larger players, or “larger participants.”. Last summer, the CFPB sought public comment to develop an initial rule, identifying six possible markets for consideration—debt collection, consumer reporting, prepaid cards, debt relief services, consumer credit and related activities, and money transmitting, check cashing and related activities. The CFPB will soon propose its initial rule on this issue.

As I reported here yesterday, Obama's recess appointment follows months of Republican demands that Democrats weaken the new agency before they'd consider confirming anyone to run it.  Since that effectively blocked the new agency from performing many of its duties 2010's Dodd-Frank financial reform, Atlantic writer James Fallows rightly described it as a modern attempt at nullification. Central to the GOP's efforts was a maneuver designed to keep the Senate formally "in session" even with virtually every senator out of town.

On Wednesday, President Obama announced he was fighting back with a recess appointment in defiance of the GOP's stance. Republican leaders and their financial-industry allies said the decision would cast a legal shadow over every action the CFPB now takes.

That may be true, at least until the courts rule on the appointment or decline to consider it as a political question.  But it's clear that Obama didn't have a better choice - unless he was willing to abandon his commitment to the new agency and the strengthened consumer protection it promises.

The old system didn't work to protect consumers, and the entire economy has suffered as a result.  For instance, the Federal Reserve was given authority to regulate subprime loans in the early 1990s, but didn't exercise it until after the housing bubble collapsed.  For almost as long, credit-card lenders jacked up consumers' interest rates after they incurred substantial debts, invoking so-called "universal default" clauses or a contractual  right to change rates "at any time for any reason," until the Fed finally concluded that such practices were unfair and deceptive in 2008.  Of course, if they were unfair and deceptive in 2008, they were unfair and deceptive when I first started writing about them a decade ago. But as I learned then, no federal agency was willing to state the obvious, beyond vague warnings to banks that some practices might be inconsistent with their "safety and soundness" - the banking regulators' chief focus, and one they failed at miserably.

Now consumers have an agency designed to protect their interests. And in our consumer-driven economy, that's also an agency that should protect us all. If we can keep it.