Senate Majority Leader Harry Reid appears to be ready to exercise the “nuclear option” on Senate confirmations of executive branch nominees. Doing so would allow president Obama to push appointees through without subjecting them to the scrutiny and consent of at least a few Republican senators, a rule change Republicans chose not to pass even when many of president Bush’s nominees faced fierce opposition from Senate Democrats. Central to the conflict between Democrats and Republicans is Consumer Financial Protection Bureau (CFPB) director Richard Cordray: Republicans resist a deal that involves a confirmation vote on him without structural changes to the CFPB. That’s why Democrats oppose any deal that doesn’t include such a vote.
President Obama “recess appointed” Cordray to head the CFPB in early January 2012, in a constitutionally dubious move, before formally nominating him to the post in January this year. Republicans have opposed him, among other reasons because they prefer that the agency be led by a bipartisan committee of directors. They fear that the CFPB, with funding that comes directly from the Federal Reserve, will become an unaccountable, uncontrollable organization for at least the next five years. Democrats argue that other agencies, such as the OCC or the SEC, are held accountable in very similar ways. The one thing everyone agrees on? The CFPB is a very new agency with new powers, having been created by Dodd-Frank. Cordray, if confirmed, would be its first actual full-term director.
In the early stages of its existence, an agency endowed with newly-created responsibilities can have an especially large impact on the markets it regulates. In the CFPB’s case, an example of particular importance is the mortgage market, so tightly linked to the origins of the 2008 financial crisis. The Bureau has started issuing rules to regulate this market more stringently. For example, in January it proposed a rule telling mortgage lenders how to assess consumers’ ability to repay home loans before extending them. If lenders follow the criteria presented in this rule, which is meant to go into effect in January 2014, they will enjoy legal protection in case borrowers claim they were tricked into borrowing more than they could afford. This rule will change the mortgage market dramatically, as lenders will expose themselves to costly settlements and loan buybacks if they extend loans that do not meet the criteria suggested by the CFPB, so called “non-qualified” loans. Such a loan would become a de facto subprime loan, and of course, there will still be demand for such loans.
So who will provide these loans? Unless you can predict how the regulator will deal with loans originated outside the legally protected realm, originating them will be extraordinarily risky. Step in Raj Date, former deputy director and acting director of the CFPB. He left the Bureau on January 31st, right after the mortgage rule proposal was completed, to “spend more time with his family.” Normally that means a politician is running away from a mishap or scandal, but in this case it meant that two months later, Mr. Date had started his own firm, Fenway Summer, registered in Delaware on March 11th, which will become the “leading originator of nonqualified mortgages.” What about other firms that want a piece of that market? Well, they can use the “strategic and financial” advice Mr. Date has on offer. His new colleagues include quite a few of his old colleagues, including the CFPB’s chief of staff, its senior advisor for mortgage servicing and securitization, and its regulatory senior council. Or they can subject themselves to the whims of the new agency without the peace of heart provided by what has been likened to a “protection racket.”