Un-Warrented: American Consumers Lose Their Biggest Defender

At long last, the Consumer Financial Protection Bureau launches officially this week. Unfortunately, so far it seems that what happens on Thursday, July 21st could be more of a lurch than a launch. As has been rumored over the past few weeks, President Obama bypassed the chief architect and advocate of the Bureau, Elizabeth Warren, to be its first director. He nominated Richard Cordray, the former Attorney General of Ohio, who rose to national prominence for his aggressive and largely successful attacks against financial fraud. In many ways he led the charge of state officials seeking to redress large-scale and truly national frauds.

Mr. Cordray is tough, real smart and a first-class guy. He comes with one hell of an endorsement—Elizabeth Warren chose him to be her Chief of Enforcement. No one is rooting for him more than I am.

[Related video: Adam Levin on Warren vs Cordray: Who’s The Better Pick?]

Conventional wisdom is that Republican opposition to the Warren nomination was sufficiently potent and monolithic so as to create yet another difficult situation for a President already beleaguered by a well-organized, fractious and relentlessly partisan pushback. It was politically expedient to avoid forcing the Warren nomination; indeed, one can argue that the Republican hostility toward Warren had become more personal than policy-based, though few, if any, on the conservative side of the aisle supported the concept of a powerful, focused federal consumer protection agency. She is tough, outspoken (“I can throw rocks,” she said on MSNBC’s Rachel Maddow Show 7/18), tirelessly committed to the protection of middle-class American families, and, of late, had been subjected to extremely hostile questioning before a number of House and Senate committees.

I have no doubt that in the viciously polarized world of Washington, the passionate embrace of Warren by liberals and consumer advocacy organizations alike caused an equal and very opposite reaction by conservative and pro-business groups and doomed the promise of her nomination.

[Related article: Post Warren, the Battle Over the CFPB is Far From Over]

It’s no secret that President Obama and certain high-ranking administration officials—particularly Treasury Secretary Timothy Geithner—were never truly sold on Warren as the right first director of the agency she conceived. They had real questions about her ability to get things done in 21st century Washington. Frankly, she was too bold in her defense of the American consumer. For her, it was never about the sound bite, it was a crusade. Unfortunately for Professor Warren and the rest of us, the U.S. Chamber of Commerce, the American Bankers Association and their legislative minions equate “pro-consumer” with being “anti-business.”

In a typical demonstration of what’s wrong with partisan politics these days, Republican Senator Richard Shelby immediately responded to the Cordray appointment by saying that the GOP is as committed to blocking his nomination as they were to stopping Warren. Actually, forty-four GOP Senators have been on the record for weeks opposing the nomination of anyone to run the agency. The simple truth is that the Grand Old Party and their Tea Party colleagues are committed to abort the CFPB fetus before it emerges from the womb of Dodd Frank. I don’t get it.

[Related article: Obama Taps New Consumer Watchdog]

Last time I checked, Republicans are consumers, too. So are their families. So are their constituents. Are they truly content to stand idly by, indeed, willing to perpetuate an environment that allows their own people, as well as legitimate members of the business community, to get ripped off?  (And if you doubt that consumers really do want to be better protected, take a look at this just released poll from the Center for Responsible Lending.) In any event, as I’ve said before, unless the agency is defanged, ideologically mangled, or financially suffocated, the Biz Boys Club and their Congressional retainers will do whatever is necessary to snuff out what several politicians have hyperbolically referred to as the “most powerful agency ever.”

The good news is that the Bureau is and will be, despite all of the efforts to render it headless, strangle its funding, and limit its powers. However, unless and until there is a director, it can only embark on a more modest mission to enforce laws transferred from several other federal agencies when it comes to the biggest institutions, but its activities are more muted when it comes to non-banking financial and credit institutions—such as payday lenders, mortgage brokers, debt collectors, credit reporting agencies and the like.

And so, the prosecutor has now become the King whilst the rightful ruler has been dispatched to the ivory tower and the rules of engagement are somewhat murky and limited.

[Related article: What the CFPB Should Do About Debt Collectors]

Un-Warrented … (cont.) »

Image of Richard Cordray: ProgressOhio, via Flickr.com

Image of Elizabeth Warren: Edward Kimmel, via Flickr.com

My problem is that, while enforcement is a critical part of the bureau’s legislative mandate, I have always believed that two equally important missions of the CFPB involve financial literacy education for consumers and its role as a policymaker and advocate for middle class families. Professor Warren’s skills and credentials in these areas are above reproach. She has been an educator for most of her life and perhaps her greatest strength is policymaking in the consumer protection space. By contrast, Mr. Cordray has little background in either of these areas. Though I have no doubt he is a quick study.

Mr. Cordray’s considerable success as the Ohio Attorney General was earned primarily on behalf of large institutions rather than individual consumers. For example, in pursuing Bank of America for misleading statements and lack of disclosure regarding the condition of Merrill Lynch during the acquisition of the failing brokerage giant, the primary beneficiaries of Cordray’s laudable success were largely Merrill’s bondholders, the vast majority of whom probably weren’t teachers, firefighters or taxi drivers. That said, Cordray was the very first state Attorney General to sue a bank for robo-signing, which puts him way ahead of the curve in my book.

[Related articles: Credit.com’s coverage of the robo-signing scandal]

The fact is that if you take a good look back at the financial crisis that began in 2008 and continues today, most of it is attributable to predatory and irresponsible mortgage practices that were deplorable but NOT illegal. In other words, I believe that the most important role of the CFPB in this regard is the creation of new policies and rules to protect individual borrowers and consumers, not to enforce existing laws that were and are—obviously—inadequate. In particular, the mortgage crisis makes it clear that no one had to break the law to con us. The vast majority of those creative option-ARMS were perfectly legal, terribly innovative and clearly, as Warren Buffett labeled them, weapons of mass destruction. So while it is obviously very important to enforce the law, it is more important to make effective laws and rules that can then be efficiently enforced.

Additionally, one of the other root causes of our current financial malaise was the lack of financial literacy among the general population in this country. The victims of the legal con run by all those avaricious bankers and brokers were excellent targets, because they really didn’t know much about money, or mortgages, or borrowing in general—but unfortunately now they’re getting a crash course in foreclosure. There is no law, however wise and rigorously enforced, that can substitute for a financially educated populace. Knowledge is, after all, power. In sum, in order to prevent a repeat of recent financial history, the CFPB must ensure that Americans know as much about financial matters as they do about Kim Kardashian, and it must make and enforce new rules that protect consumers within every financial strata, not just the folks who buy the bonds issued by firms like Merrill Lynch.

[Related article: 3 Ways the CFPB Can Help Protect Young Consumers]

The good news is that Richard Cordray is a really smart, dedicated, and talented public servant. Although when first appointed as Enforcement chief, he described his tenure as a “layover in Washington” until he could return to Ohio to run again, it is likely that the power and prestige of his new position will inspire him to change his mind and engage his considerable intellect. Lost in the excitement and gravity of recent events is the trivia factoid that Cordray was a five-time Jeopardy champion!

I don’t know about you, but I’ve always felt that anybody who could win Jeopardy, especially a five-time champion, could do anything they might want to do if they put their mind to it.

[Related article: How the CFPB Should “Regulate” Credit Reporting and Credit Scoring]