The Shoot-Out Over Cordray [Mortgage Banking]

When outlaws ruled the West

And fear filled the land,

A cry went up for a man with guts

To take the West in hand.

They needed a man who was brave and true

With justice for all as his aim,

Then out of the sun rode a man with a gun

And Cordray was his name, yes, Cordray was his name.

- Adapted from the Blazing Saddles theme (with apologies to Mel Brooks and Frankie Laine)

In addition to taking over a large part of the enforcement and regulatory authority from existing federal banking regulators, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) gave the Consumer Financial Protection Bureau (CFPB) dominion over non-depository providers of financial products and services. They included providers of residential mortgages, loan-modification and foreclosure-relief services, private student loans, payday loans, and individuals and corporations that "the bureau has reasonable cause to determine . . . based on complaints ... or information from other sources" are engaging in "conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services."

These providers' activities have gone largely unregulated, at least at the federal level, and because the power to prescribe new rules for non-depositories is vested in the director of the CFPB, and the bureau hasn't had one, it has not been able to move forward on the DFA mandate.

That all changed on Jan. 4, 2012, when President Obama announced he had appointed Richard Cordray (the existing head of the CFPB s Enforcement Division) as its director.

Since Cordray made headlines as Ohio's attorney general by suing Ally Financial alleging fraudulent foreclosures, the ratings agencies alleging inflated and misleading residential mortgage-backed securities (RMBS) ratings, and Bank of America (BofA) alleging inadequate disclosure to shareholders prior to the vote on BofA's acquisition of Merrill Lynch, the financial services industry is understandably not feeling too warm and fuzzy about the appointment. While there may come a day when the legality of the appointment and Cordray's authority to issue new rules are tested in the courts, he is, for the time being, large and in charge.

The big question now is: Given his history, how will Cordray exercise his new powers over non-depositories?

In his first speech, given the day after his appointment, Cordray came out swinging on behalf of consumers. He spoke about "good people with good intentions drowning in debts they could not afford . . . [and] families bankrupted by complex mortgages with spiraling interest costs they did not understand," and the "novel and exotic mortgages [that] battered housing markets . . . triggered the financial crisis . . . and hurt millions."

In concluding his introductory remarks, Cordray said, "Consumers deserve to have someone who will stand on their side . . . protect them against fraud and . . . ensure they are treated fairly. The new consumer bureau was created to make sure these things are achieved for all Americans."

After citing more consumer misadventures with payday lenders and mortgage servicers, Cordray reaffirmed that one of the bureau's primary objectives is to ensure that buyers and sellers understand the terms of the transaction and that consumers have the transparency they need to do apple-toapple comparison shopping. But because "transparency alone is not enough . . . another key objective is making sure that financial institutions are playing by the rules" through examination and enforcement.

Cordray said that holding both banks and nonbanks accountable to consumer financial laws will also create a better environment for the honest businesses that serve consumers. As this issue was going to press, it was announced that the CFPB, in the first known formal investigation brought in its own name, is investigating allegations that PHH Corporation paid kickbacks to lenders and bankers in exchange for them referring mortgage insurance business.

The new director then announced the launch of the bureau's supervisory program for nonbanks, beginning with payday lenders, mortgage servicers and originators, and "other firms that often compete with banks." Noting that these nonbank providers "are not used to any federal oversight," Cordray wryly noted that CFPB supervision "may be a challenge for them."

He stated that the CFPB intends to establish "clear standards of conduct so that all financial providers play by the rules." Toward that end, Cordray noted that the bureau has established a "Tell Your Story" Web portal for consumers to let the CFPB know "how the market really works," as well as a portal for complaints about credit cards and mortgages.

In a posting on its website, the CFPB says it intends to implement its new authority in phases. Mortgage companies, payday lenders, private education lenders and firms that pose a risk to consumers are immediately subject to CFPB supervision.

While DFA also grants the CFPB authority over "larger participants" of other types, the bureau must first define exactly what a "larger participant" is. The CFPB has been taking public comment on that issue since June 2011, and has identified several 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 bureau is expected to issue a proposed initial rule in the very near future.

Examiners will be cross-trained for both types of reviews and will be stationed in field offices in New York, Chicago, San Francisco and Washington, D.C, in order "to ensure that supervision staff members understand the business practices and dynamics in different regional and local markets."

Where applicable, the CFPB will coordinate its nonbank supervision program with state regulators. Forty-two states and Puerto Rico, representing 45 regulatory agencies, have signed a memorandum of understanding that allows state regulators and state regulatory associations to share information with the CFPB.

The nonbank supervisory program will mirror the bureau's bank examination program. Specifically, CFPB examiners will review publicly available information, and information from state or federal regulators, before making site visits, which will generally be pre-announced. With the focus on risk to consumers, examiners will evaluate the business' consumer financial products and services.

They will also evaluate compliance with federal consumer financial laws - including the Truth in Lending Act (TlLA), the Real Estate Settlement Procedures Act (RESPA) and the Equal Credit Opportunity Act - throughout the entire life cycle of the product or service. That means from development and marketing through sales and product management.

According to the bureau, nonbank companies' internal ability to detect, prevent and remedy violations is an important component of the examination. It is likely that non-depositories will eventually be required to file reports with the CFPB.

The publicly announced next steps for the bureau include:

* Publishing additional examination procedures tailored to the types of consumer financial products and services offered by nonbanks;

* Publishing rules to establish procedures to supervise nonbank companies the CFPB has reasonable cause to believe pose risks to consumers;

* Continuing to work with state and federal regulators on examination planning; and

* Continuing to obtain feedback on its supervision program from nonbank financial services companies, banks, thrifts and credit unions, federal and state agencies, consumer and community groups, and the general public.

The bureau's aggressive agenda has been overshadowed by the unusual circumstances surrounding Cordray's appointment. Article 11, section 2, clause 2 of the U.S. Constitution provides that the power to appoint high-level policy-making positions is shared between the president and the Senate. Article II, section 2, clause 3 gives the president the authority to fill vacant positions when the Senate is in recess, but it also provides that the appointee can only serve until the end of the Senate's next session or until an individual (either the recess appointee or someone else) is nominated, confirmed and permanently appointed to the position, whichever occurs first.

The 20th amendment to the Constitution provides that a session begins on Jan. 3 each year, unless the Senate picks another date, and continues until a sine die (end of the day) adjournment, which usually happens in the fall. A recess is just a break in the proceedings of a session, and it can't last for more than three days unless both the House and the Senate agree to it. A recess while Congress is in session is called an "intrasession," and a recess called between the sine die adjournment of the Senate and the convening of the next session is called an "intersession."

The controversy surrounding Cordray's appointment arose because the Senate was not, technically speaking, in recess at the time because it continued to meet in a proforma session every three to four days. A pro forma session is usually called to avoid the adjournment clause requirement that both houses of Congress agree to a recess and no actual work is done in these sessions. If there were a legal challenge and a court were to find that the Senate was actually in session when the appointment was made, then the president did not have the authority to make the appointment and any action taken by Cordray as director would also be unauthorized.

Assuming that the Senate was in recess and that Cordray's was a legal appointment, there is still some uncertainty surrounding how long his term will last.

While by statute a nominated and confirmed director would serve five years, if the appointment was made before the second session of the current Congress officially began, Cordray would serve until the Senate adjourns in the fall of 2012. If the appointment was made after the second session began, he would serve until adjournment in 2013. The press release issued by the White House on Jan. 4 states that "President Obama announced today his intent to recess appoint" Cordray - so it's not clear when the appointment was actually made. This could prove to be yet another bone of contention.

A former Senate-confirmed presidential appointee who wishes to remain anonymous says that a permanent director will eventually have to be nominated and confirmed by the Senate, which is unlikely to happen if the Republicans can successfully continue their filibuster over having a director instead of a board of directors in charge of the CFPB.

This source also says that Cordray is rumored to be interested in running for governor in Ohio, and that the appointment gives him the visibility and gravitas to launch that campaign in time for the gubernatorial election in 2014. Other sources say that the appointment enables the work of the CFPB to continue until after the 2012 elections, which the Obama administration hopes will turn the political tables and result in Cordray's confirmation.

The uncertainty surrounding the appointment, and differing legal opinions on its legality, means that actions taken by the CFPB under Cordray's ambitious agenda may be subject to challenge in the courts. But unless and until that happens, the industry would be well advised to pay close attention to "the man with the gun."

Ann Fulmer (based in Washington. D.C.) is vice president of business relations at Agoura Hills, California-based Interthinx. She can be reached at [email protected].