One way to think about how the Dodd-Frank Wall Street Reform and Consumer Protection Act goes about policing finance is that it levels the playing field of rules and regulations between bank and non-bank financial firms. In the lead up to the crisis, financial firms acted like “shadow banks” without having to follow the rules regular banks did. The legal and regulatory infrastructure that evolved since the Great Depression for regular banks was never extended to these new shadow banks.
This was especially true for consumer financial products, particularly home mortgages. There’s a solid regulatory network for home mortgages in place when it comes to regular banks. However, when it came to subprime mortgages made through non-bank lenders, those rules didn’t apply. Many financial regulators urged Federal Reserve Chairman Alan Greenspan to have the Fed start regulating subprime and leveling the regulatory playing field. So did the GAO and a HUD-Treasury task force. Greenspan wouldn’t. Hence Dodd-Frank’s emphasis on reducing regulatory arbitrage by creating a special Bureau to consolidate consumer financial protection in one place.
But the Consumer Financial Protection Bureau (CFPB) needs a director in order to start working on reducing the uneven playing field. As a recent report noted, “[w]ithout a Director, the CFPB cannot fully supervise non‐bank financial institutions such as independent payday lenders, non‐bank mortgage lenders, non‐bank mortgage servicers, debt collectors, credit reporting agencies and private student lenders.” Enter our dysfunctional Senate.
In early May of 2011, 44 Republican Senators signed onto a letter that requested three specific changes before they confirmed any nominee, “regardless of party affiliation,” to head the CFPB. The changes included replacing “the single Director with a board to oversee the Bureau” and subjecting “the Bureau to the Congressional appropriations process.”
We talked about this at length here. Dodd-Frank, signed into law in July 2010, created a Consumer Financial Protection Bureau that had a single director and was consciously funded in a very specific way. In order for the CFPB to fully work, it needs an appointed director — certain powers don’t kick in otherwise. So in effect a minority of Republican Senators say that they won’t allow an act of law to be fully implemented unless certain, crucial, parts of the law are overturned.
People are correctly referring to this as a new nullification crisis (see also here). Brookings Scholar Thomas Mann notes that insisting “that a legitimately passed law be changed before allowing it to function with a director [is] a modern-day form of nullification. Same with the director of the Center for Medicare and Medicaid Services. There is nothing normal or routine about this. The Senate policing of non-cabinet appointments is sometimes more aggressive but the current practice goes well beyond that, more like pre-Civil War days than 20th century practice.” This has also gone on with the NLRB and, in a way, went on with the debt ceiling battle. Eventually the administration needed to challenge this.
So it’s great to see the administration recess appoint Richard Cordray as director. ThinkProgress outlines the initial legal analysis as to why Obama has the power to do this. Cordray will make a great director for the CFPB and the Bureau will continue to do the excellent work that it has already done.
It’s a shame that more confirmations weren’t pushed through with this window. A large number of financial regulator positions need to be filled, and even more judicial spots sit empty. In terms of building a longer-term, ascendent liberalism, it is essential to appoint people such as judges and nurture them to become strong leaders in the future.
It is uncertain whether this will shut down the confirmation process in the Senate, which may escalate tensions. If so, it will be a good time to reexamine how confirmations happen in the Senate more broadly. This is a part of government that was never meant to work the way it does now, and it is having serious consequences for the country.