In what consumer groups are heralding as a historic moment for American families, a new federal consumer financial watchdog agency officially opened for business Thursday. It is doing so, however, amid a swirl of controversy and uncertainty about its future, its leadership and its actual powers.
"It's definitely historic," says Lauren Saunders of the National Consumer Law Center. "We have, for the first time, an agency whose primary focus will be protecting consumers from unfair, deceptive and abusive practices."
Watching the new consumer
What: A new federal watchdog agency charged with protecting consumers from harmful financial products opened for business July 21, 2011.
Why it's important: The Consumer Financial Protection Bureau has broad powers to police banks and other providers of financial services, sanction violators and draft new laws to protect consumers.
What's next: The agency faces hurdles from Day 1: Some in Congress want to cut its budget, others want to water down its powers and the director nominated by the White House faces a rocky Senate confirmation process.
Never before has the country had a national-level, independent watchdog focused solely on consumer interests with broad powers to police, enforce and write new laws to curb financial shenanigans such as mortgage fine print and credit card gotchas. (See: Your financial watchdog: what it can do.)
"Examiners have the right to request any information they need to make sure that the bank is complying with the law and not engaging in unfair practices," says Saunders. "Even better than a cop on the street, is having a cop inside the bank, looking over their shoulder. They don't have to wait until something goes out onto the street to act."
But the new agency -- the Consumer Financial Protection Bureau (CFPB) -- opens under a cloud rather than confetti. Supporters and opponents alike use words like "handicapped," "hobbled" and "one hand tied behind its back" to describe its grand opening.
So far, the bureau has hired only a fraction of its full staff -- about 500 of the 1,200 expected. It has no permanent office space yet.
Although it has been billed as a one-stop clearinghouse for consumer complaints about all types of financial products, the agency will be able to take complaints only about credit cards on July 21. A Web-based complaint system won't be fully up and running for several more months.
The agency itself is under attack from several quarters on Capitol Hill by Republican lawmakers and bankers, who opposed its inclusion in the massive 2010 Wall Street reform law and now want to cripple it by reducing funding or watering down its powers.
"It's a headless agency," says Richard Hunt, president of the Consumer Bankers Association, a trade group of retail bankers whose members have fallen under the watch of the new watchdog. "We are astonished, surprised, perplexed and flabbergasted that there is not a director of the CFPB in place."
He added after the announcement of Cordray: "The absence of a confirmed director and the enormous powers of this new agency have created a time of great uncertainty for the retail banking industry."
Directorship mired in politics
The unofficial director, former Harvard law Professor Elizabeth Warren, has been steering the bureau through its startup. Her official title is assistant to the president and special adviser to the Secretary of the Treasury. She recruited Cordray, who became the bureau's chief of enforcement in January 2011.
Over the past several months, it has been Warren, a soft-spoken advocate for consumer interests, who has become the face and voice of the CFPB, testifying before Congress, meeting with finance industry executives, journalists and consumer groups over the past nine months.The idea for a special federal watchdog over consumer financial interests was hers.
Even better than a cop on the street, is having a cop inside the bank, looking over their shoulder. They don't have to wait until something goes out onto the street to act.
National Consumer Law Center
"Ideally, it should be Elizabeth Warren," says Ruth Susswein, deputy director of national priorities for the Consumer Action advocacy group. Despite their disappointment that Warren didn't get the nomination, consumer groups expressed support for Cordray, who had a reputation for championing families in the foreclosure crisis and for advocating credit card reform in Ohio. As head of enforcement for the bureau, he has already signaled his intentions to aggressively monitor bank operations. He has vowed to start probing banks as one of the agency's initial acts.
"Richard Cordray certainly has the requisite knowledge of the financial services marketplace and a demonstrated consumer protection track record to be qualified to be the CFPB's first director," Travis Plunkett, legislation director of the Consumer Federation of America, said in a statement, adding since Cordray is already leading enforcement for the bureau, "He is well positioned to get the agency off to an effective start."
Republican Congress members and banking industry executives have already declared their opposition to a director -- any director. Forty-four senators signed a letter saying they would vote against Obama's nominee unless the bureau's powers are scaled back. Opponents of the agency want it to be headed by a five-member commission rather a director, and to require it to come to Congress annually for its funding, moves that would make the agency less independent, consumer advocates say.
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Like all Cabinet-level positions, the bureau director must be appointed by the president and confirmed by a majority of the U.S. Senate. The Dodd-Frank Act, the federal law that created the bureau, states that the director must be confirmed by the Senate.
The president can also make what is called a recess appointment, a legal route taken by numerous presidents over the years to bypass what can be a contentious, highly political Senate confirmation process. As the name implies, recess appointments are made while the Senate is in recess and can take no action on the nominee. The person gets the job automatically, but only for a limited time. Senators deliberately avoided going on recess for the Fourth of July holiday, in part because of the budget deficit bypass and, some speculate, to prevent Obama from appointing a CFPB director. The next recess is in August.
Limited powers on Day 1 Lack of a confirmed director has handicapped what the bureau can do, but it will still be potent. According to a January 2011 Inspector General's Office ruling, as of July 21, 2011, the authority to oversee and examine potential consumer protection violations by banks and credit unions with more than $10 billion in assets shifts from several different existing federal agencies to the CFPB. Enforcement of more than a dozen existing consumer protection laws -- such as the Credit CARD Act of 2009 or the Fair Debt Collection Practices Act -- can begin immediately on July 21.
However, until there is an official director, the ruling says, the CFPB cannot write new rules or oversee industries that aren't currently supervised by existing regulators, such as payday lenders, debt collectors and credit repair companies.
"They are starting with one hand tied behind their back since they won't be able to use every tool in their basket," says Susswein, from Consumer Action.
Pamela Banks, senior policy counsel for Consumers Union, the nonprofit owners of Consumer Reports magazine, says the agency can move forward without a leader: "They don't have to sit on their hands until a director is in place. They have already started gathering research, trying to define who is a nonbank. They're out there trying to think about the issues so that whenever they get a director in place, they will be able to move more swiftly."
Hunt, from the consumer bankers group, says banks face uncertainty in the months ahead with a new regulator that has no director in place. "We welcome the scrutiny," Hunt says. "We are a heavily regulated industry ... We just hope they aren't overly aggressive. You could have rogue players within the agency without the executive at the top."
Banks, from the Consumers Union, says lenders are leery of the new scrutiny and fearful of the unknown. "They don't know what to expect," Banks says. "This is the first agency that will have a magnifying glass for what they are doing and the products they are offering."
Richard Cordray certainly has the requisite knowledge of the financial services marketplace and a demonstrated consumer protection track record to be qualified to be the CFPB's first director.
Consumer Federation of America
She adds: "A lot of these entities have been making money off of consumers by charging ridiculous fees ... Whenever you interfere with people's income streams, there are bound to be concerns."
Credit cards and mortgages targeted Although the agency's startup may be rocky, the CFPB is setting its sights on two big targets for initial scrutiny: credit cards and mortgages. In its "Know Before You Owe" project, the agency has already drafted mock-ups of simple disclosure forms to help consumers shopping for mortgages. Plain English credit card agreements are likely soon to follow. (See U.S. credit card agreements unreadable to 4 out of 5 adults.)
"You should be able to take three credit card agreements," Warren told reporters and editors during a June 2010 White House briefing for personal finance journalists. She gestured with her hands, as if slapping three credit card agreements down in front of her. "Put them on the table and say, 'That's the least expensive. That's the riskiest.' "
She added: "If we can do that, families can ask two questions: 'Can I afford this?' And, 'Is this the best deal I can get?'"
In February 2011, a year after the major CARD Act provisions took effect, Warren led a forum on the state of credit cardsand issued a report showing that the 2009 reform law had improved credit cards , but confusion about complex terms remained for many consumers.
The forum was one of several initiatives, including engaging the public through its website and social media, cited in a agency startup progress report issued Monday.
Centralizing credit card complaints The agency has targeted credit cards because they are so prevalent among American families. Nearly eight out 10 consumers (78 percent) own a credit card, according to the Fed's latest Survey of Consumer Payment Choice. The Credit CARD Act, which limits how often card issuers can increase interest rates and eliminates surprised rate hikes, has done a lot to make credit cards safer, but more can be done to curb abuses and to make them easier to compare, Warren and others have said.
We are astonished, surprised, perplexed and flabbergasted that there is not a director of the CFPB in place.
Consumer Bankers Association
To help make complaining about credit cards easier, the bureau's new beta-test version of the Consumer Response Center, a Web-based complaint-logging system, is up and running on a limited basis. Currently, credit card holders must contact one of seven different agencies to file complaints, depending on which regulator oversees the card issuer. (See How to complain about a credit card issuer.)
The initial CFPB complaint system takes only credit card complaints. Consumers with complaints or problems with all other financial products will be directed to the Federal Trade Commission or other agencies currently responsible for regulating those industries.
Avoiding another financial crisis Helping consumers navigate what has become a complex world of financial products will help the entire economy, bankers and consumer advocates say.
Lisa Donner, executive director of Americans for Financial Reform, said the 2008 mortgage crisis that crippled Wall Street made the need "astoundingly clear" for a new consumer financial watchdog. Under the current federal regulatory system, banks are reviewed for the safety and soundness of their banking operations by the same regulators that review whether they comply with consumer protection laws. However, critics say, the Fed, the OCC and other regulators have not given consumer protection the attention it deserves.
"If the regulators hadn't ignored and allowed to continue -- despite it being drawn to their attention again and again -- huge volumes of abusive mortgages, we wouldn't have had this financial crisis," Donner says. "Lots of people knew that abusive loans were being made that should not have been permitted. The Federal Reserve had the power to stop many of them, but they didn't act and we ended up with a crisis."
She adds: "It's a lesson that abuses in the consumer finances market hurt individuals everyday ... but they can also have a systematic impact."
Leveling the playing field Unlike banks and credit unions, which must open their books and allow federal examiners in to review their business practices, nonbank financial institutions have not had such close scrutiny. Payday lenders, credit reporting bureaus and prepaid card providers must abide by federal lending and consumer protection laws, but their operations are not under the same kind of microscope for review. The Dodd-Frank Act changes that.
As soon as the agency has a director, the CFPB will have the authority to send examiners in to review practices of all payday lenders, mortgage brokers and private student loan providers. The agency has supervisory review powers over only the "largest participants" in other nonbank markets, such as credit reporting bureaus, debt collectors and money transfer providers. The law gives the CFPB a July 21, 2012, deadline to define who are the "largest participants." Until that is in place, the bureau can't send examiners in to supervise those institutions.
Although they are disappointed nonbanks won't immediately fall under the CFPB's oversight umbrella, banks are glad that these companies will be subject to the same kind of on-site reviews of books and operations that banks receive.
The banking industry views the agency as hopefully being a vehicle to create to more level approach to enforcement of consumer protection.
American Bankers Association
"What we haven't had is the same kind of oversight for nonbanks," says Richard Riese, senior vice president of the American Bankers Association trade group. "The banking industry views the agency as hopefully being a vehicle to create a more level approach to enforcement of consumer protection."
A representative from at least one nonbank industry, payday lenders, says he welcomes the scrutiny: "We want to be a constructive partner with the new agency," says Jamie Fulmer, vice president of public affairs at Advance America Cash Advance Centers Inc. He adds: "What you worry about ... is that someone imposes a rule or regulation that's meant to protect consumers but unfortunately it thrusts them into a host of unintended consequences."
Don't expect too much too soon Some caution consumers not to expect too much too soon from their new financial watchdog. Credit cards and other financial products won't magically become clearer or less tricky with the bureau's debut.
"This is a new agency getting started up," says Banks, from Consumers Union. "Over the next few years, you'll see a lot of progress ... In the interim, people need to be patient. They'll get there ...but they can't be effective until they are allowed to get their legs under them."
Says Hunt, from the consumer bankers group: "The jury is going to be out on the effectiveness of the CFPB ... It will be years before we can find out if this is going to be an effective agency or not."
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