How Jersey lender PHH's case could kill U.S. consumer watchdog
People who are careless with money - theirs, or other people's - can't expect to prosper. But credit isn't just a private problem: Reckless lenders tend to drive out careful ones, boosting costs and stalling the economy for hard-working thrifty people, too.
A lot of public agencies — the Fed, the FDIC, Treasury, and state examiners — are supposed to watchdog America's banks.
Mostly, their job is to make sure banks don't wreck themselves by making stupid loans that won't get paid back — which has been a recurring problem since we've had banks, given their old cycle of booms and busts.
You can argue that people who are careless with money — theirs or other people's — can't expect to prosper. Why should government have to act as nanny to borrowers, or to lenders, for that matter?
But credit isn't just a private problem: Reckless lenders tend to drive out careful ones, boosting costs and stalling the economy for hard-working thrifty people, too. That's why we have all those bank regulators, and all the complex regulation that arises when laws affect powerful interests.
The agencies are also supposed to enforce the lending rules that Congress passes in its occasional spasms of concern for the borrowing public. But the regulators' main job is trying to make sure banks stay healthy so they can keep pumping out cash.
The Consumer Financial Protection Bureau is different. Formed by liberal Democrats who briefly controlled Congress after the last bank meltdown, the agency has the sole job of keeping lenders from ripping off borrowers.
That mission is controversial in Washington, which is now run by the Republicans most Americans have lately elected to keep the government from doing more.
But the bureau keeps slugging. For example, in the last year, it has collected a $100 million penalty from Wells Fargo — the biggest bank in Philadelphia and many other cities — for relentlessly setting up phony accounts for people who didn't ask for them; sued Wilmington-based student-loan servicer Navient for failing to tell borrowers how they can cut government-subsidized college-loan costs; and demanded $109 million from Mount Laurel-based home loan servicer PHH Corp., for pocketing what the bureau called kickbacks on mortgage insurance payments.
PHH now is fighting back, with a team of all-star lawyers headed by Theodore B. Olson, the ex-solicitor general who won both the Bush v. Gore case making George W. Bush president, and the Citizens United case protecting billionaires' campaign cash as free speech.
In PHH's defense, Olson argued that the bureau is unconstitutional. While agencies such as the SEC or the FCC (he might have added, the Federal Reserve) report to long-serving boards with independent funding that presidents and Congress cannot easily control, the bureau has its autonomous powers vested in a single official, currently founding leader Richard Cordray, put there by then-President Barack Obama.
A three-judge appeals panel agreed that Cordray has too much power. But in its decision last year the judges stopped short of dissolving the bureau, suggesting changes that would make it less like an independent agency, and more like a cabinet department. So that maybe a president like Trump could simply replace fighter Cordray with someone less aggressive toward the banks, in line with Republican leaders' contentions that the bureau is an obstacle to free lending and rapid economic growth.
The court also said the bureau ought to do more to show that PHH overcharged borrowers for the insurance it sold them, kickbacks and all.
The bureau appealed, backed by AARP and Democratic state attorneys general. Cordray's job now rests with the appeals court, which heard arguments last week, and should rule later this year.
Separately, President Trump, on Page 158 of his budget proposal, wants to stop funding the bureau and let Congress set its budget and tone.
But even if the banks win, and the bureau loses, and the president gets the power to put his own boss in charge, "we doubt the Trump administration will fire current CFPB Director Richard Cordray immediately," Brian Gardner and Michael Michaud, policy analysts for financial-investment bank Keefe Bruyette & Woods, reported to clients last week.
Because of politics: Cordray is a potential Democratic candidate for governor of Ohio in the elections next year, "and firing him now could turn him into a political martyr and help him politically," Gardner and Michaud added.
Once Cordray is gone — whether he jumps, gets pushed, or is not reappointed when his term ends — the result would be good for banks and other consumer lenders so long as banker-friendly leaders control Washington, the analysts conclude. Because the bureau "is currently working on rules for debt collectors and payday lenders, those industries might get the biggest boost" from stripping the bureau of its ability to go after wayward high-fee lenders like no other government agency.
That would probably be good for lending companies such as PHH and Navient. And for high-interest-rate payday lenders, and relentless debt collectors.
Could it be good for American borrowers and for the U.S. economy? And will it drive us back into another credit bubble — big loans, big fees, big up-front profits, then big, big losses — the old cycle renewed?