Payday Lending and the CFPB: Another Pending Cordray Fail

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

I don’t mean to pick on AlterNet– especially as they published some of my articles before I started posting regularly here at Naked Capitalism. But their coverage of the Consumer Financial Protection Bureau’s (CFPB) gaping self-inflicted wound is such a prime example of the problem of substituting partisan cheerleading for tough-minded analysis that I’m going to wade in and do a bit of debunking.

Over to AlterNet, where the headline provides a good projection of what to expect in the article, Elizabeth Warren’s Pet Project Has Already Returned $12 Billion to Swindled Families—So Naturally Republicans Want It Dismantled:

Less than a week after the Consumer Financial Protection Bureau celebrated its sixth anniversary, the Trump administration issued a decisive blow to the Bureau’s latest progress regarding a key arbitrations rule, which it now aims to nullify.

For Republicans, the CFPB must be curtained like similar government agencies at the helm of President Trump’s deregulation agenda (sic).

Yes, Virginia, the Republicans hate the CFPB. And the financial industry has long opposed the agency’s project of banning its mandatory arbitration clauses– which insulate it from those pesky class action lawsuits– as I first discussed in this August post, Business Groups Aim to Strong-Arm CFPB on Arbitration.

Even though the agency had laid groundwork to ban the clauses in a comprehensive study it issued in December 2013, it somehow took til earlier this month to promulgate a final rule.

The big problem with that timetable, as I wrote last week in this post, House Votes to Overturn CFPB Mandatory Arbitration Ban, is that Republicans predictably invoked  the Congressional Review Act (CRA) process for repealing the agency’s rule. The House last week passed its resolution of disapproval of the rule, the Senate is expected to follow, and Trump has already promised to sign the result.

The short-lived rule will thereby be repealed– and unfortunately, given the terms of CRA, the CFPB cannot now promulgate any similar rule until Congress provides new legislative authority. So, as I wrote:

This leads me to a fairly obvious question: Why did CFPB director Richard Cordray wait so long for the agency to issue the rule banning mandatory arbitration? By deferring this decision until well into the Trump administration, the agency was setting itself up for this entirely predictable and inevitable CRA challenge.

I remain baffled why Cordray didn’t push for the agency to issue the rule far earlier than it did.

Was this simply a huge mistake?

Or does the answer lie in the political ambitions Cordray harbours, as he’s reportedly eyeing a run for governor of Ohio– as I discussed in my post cited above.

I’m not sure how failing to secure the mandatory arbitration rule advances those ambitions– so I won’t speculate, due to lack of any solid evidence.

Implications for Payday Lending Rule

What I do wish to discuss is what the CRA action on the mandatory arbitration rule implies for another pending CFPB priority, the payday lending rule.

Well, the American Banker reported last week this headline: CFPB to act fast on payday rule ahead of likely Cordray exit.

Now, although one would not expect the American Banker to make them, there are certainly solid, strong, substantive reasons for instituting a payday lending rule, as this recent Bloomberg column, Avoiding Payday Loans Makes the Poor Richer,  recognizes, discussing research by economist Brian Baugh:

His basic finding is that when payday lending is restricted, people who habitually borrow from these lenders see their consumption go up — not just temporarily, but in the long term. Cutting off the flow of payday loans raises household consumption by an average of 3 percent.

The CFPB first proposed a rule in June 2016 but has yet to promulgate a final version. As much as I think a rule necessary and desirable, at this point, I hope the agency elects not to promulgate a final rule, since I believe it would inevitably be subject to successful CRA procedures.

And once a payday lending rule, too, is successfully repealed, the CFPB would be barred, indefinitely, from revisiting  the issue– unless and until Congress provides new legislative authority to take up the issue.

There is really no good option here, from a consumer protection standpoint.  Whichever way the CFPB plays it, it’s a fail. Either the agency  promulgates a rule, which inevitably gets overturned by the CRA process. Or, the CFPB doesn’t promulgate any rule.

Either way, the result is no payday lending rule.

And the CFPB finds itself in this position because it didn’t act earlier to promulgate a proper rule.

Thank you, Richard Cordray!

Initial Appointment: Not the Best Choice for the Job

When  Dodd-Frank created the CFPB in 2010, there was no question that the obvious choice to head the agency was then-Harvard Law School professor Elizabeth Warren. The CFPB was, after all, her brainchild.

And, safe to say, then-Ohio Attorney General Richard Cordray wasn’t anybody’s first choice to head the agency.

Astute readers will see the man lurking behind the curtain– and the fault with the appointment not being necessarily with Cordray per se, but with the decision to appoint him to this position in the first instance.

Yves summarized the problem at the time, as well as assigned blame where due, reporting on the recess appointment of Cordray to head the agency, instead of Warren:

This move raises the obvious question: why didn’t Obama make a recess appointment of Elizabeth Warren, either back in the day when she was the de facto head, or after getting her out of the limelight for a bit (so that the Republicans would be less likely, as turned out to be the case, to engage in procedural gamesmanship to thwart a recess installation)? We had discussed this at the time, but the major reasons seemed to be: 1. Obama was never going to do anything that would seriously ruffle the banks, given that that they are a major source of campaign funds; 2. Even if Obama had a weak moment in which he was tempted to ignore consideration 1 (as in Warren might persuade banks that what was good for consumers might be good for them too), an Warren appointment would be over Geithner’s dead body, and Obama was and is dependent on Geithner….

Yves went on to mention that “Cordray was opportunistic in his anti-bank moves” while attorney general of Ohio, in the context of the litigation and negotiation that led to the robo-signing settlement.

As subsequent events  have proved. Warren was subsequently elected to the Senate– where she has further developed her record as an effective– and feared– critic of bank behavior.

I wish I could say the same for Cordray in his role as director of the CFPB..

And if Trump and Congressional Republicans are indeed able to deal a mortal blow to the agency– or at least keep it deep-sixed from engaging in effective rule-making indefinitely– it’s because they had ample help in ensuring the agency never remotely began to fulfill its promise.

This is yet another example of the gap between rhetoric and reality  I discussed in these posts, The Obamamometer’s Toxic Legacy: The Rule of Lawlessness and The Obamamometer’s Toxic Legacy: National Security.

Will Trump Fire Cordray?

Former Trump campaign manager Corey Lewandowski told NBC’s Meet the Press on Sunday, “ “It’s my recommendation to the president of the United States to fire Richard Cordray,” according to this Reuters account, Outside adviser to Trump calls for firing of CFPB head Cordray.

Republicans have clearly blown up the CFPB to be a major boogeyman– even though the agency, to date, has largely failed to fulfill much of its promise.

In January, Yves well outlined some of the arguments not to fire Cordray in this post, Will Trump Take the Poisoned Chalice of Firing CFPB Director Richard Cordray?— in which she drew heavily on a post by Georgetown law professor and former Special Counsel to the Congressional Oversight Panel Adam Levitin.

Now, it’s certainly a fool’s game to try and predict from one minute to the next  what Trump might do. But at this point, I first point out that the arguments in that post still hold.

And I would further ask, why would Trump bother?

First, as I wrote in my post last week cited above, Cordray is expected to resign soon anyway, to run for governor in Ohio. If he does resign, Trump will get to appoint a new director anyway– without need to pick another political fight.

Second, whether or not Cordray resigns or is replaced, the CRA can be wielded to block the CFPB from any effective rule-making.

CFPB Structural Flaw

I’ve followed the evolution of the CFPB from when Warren first proposed the idea– through its incorporation into Dodd-Frank, and through the twists and turns of personnel appointments,  reports, and rule-makings. I’ve written about the agency, both here at Naked Capitalism, and elsewhere.

The agency was carefully structured so as to ensure its independence– particularly in how  its director is chosen and how its budget is set. Some of these provisions were challenged in court, and some remain the subject of pending litigation.

I’m not sure, however, that anyone foresaw just how the CRA would be ruthlessly wielded to overturn just about anything the agency chooses to do– in the situation where Congress is under the control of members implacably hostile to the agency’s regulatory objectives, and a President shares the same contempt for its priorities.

And I do want to mention in passing, it’s becoming clear that the CRA can be similarly used, to overturn any rule made by another independent agency– think the Securities and Exchange Commission, or the Federal Trade Commission, or the Commodity Futures Trading Commission– if such agency chooses to exercise its independence, and regulate, in a way that does not align with the extreme deregulatory environment that currently prevails in the Republican-controlled Congress– and is supported by Trump.

Now, with the benefit of hindsight, it’s clear what a colossal mistake it was for the CFPB not to press forward earlier with signature projects such as the mandatory arbitration ban, and the payday lending rule. If either rule had been promulgated last year, the CRA would not have been in play.

This Congress could, to be sure, have overturned prior agency rule-makings– but that would have required completing  the full legislative process– not the truncated, short-form CRA alternative. And I, for one, don’t think this Congress, and this President, could have got their collective act together to do so.

Defense of Cordray

Unlike many high profile public sector attorneys– and somewhat to his credit– Cordray hasn’t taken advantage thus far of the revolving door. Although he logged some time at the corporate law firm Jones Day, he seems to see his future in electoral politics, rather than as a practicing lawyer of the Big Law variety.

Nonetheless, during his tenure at the CFPB, he didn’t exactly make any huge waves. Now, I confess I’ve never met Cordray, and cannot pretend I have any special insights into his character and behavior. Maybe by nature he’s not a wave maker. His resume is a gold-plated version of that we’ve come to expect from the best-credentialed Democrats. Cordray was Phi Beta Kappa at Michigan State, a Marshall Scholar at Brasenose College Oxford (where he earned a first), editor-in-chief of the University of Chicago Law Review, clerk to Judge Report Bork of the U.S. Court of Appeals for the District of Columbia Circuit, and clerk to Supreme Court Justice Anthony Kennedy, as well as a five-time undefeated Jeopardy! champion, according to wikipedia.

Yet somehow, those stellar credentials have failed to translate into an equally impressive set of achievements for the new consumer finance protection agency.

Now, I can anticipate that members of the commentariat will be quick to note that Cordray is performing exactly according to expectations. Sadly, I guess I must concur. Regular Naked Capitalism readers certainly know Tom Ferguson’s work on the investment theory of politics (see his latest paper,Fifty Shades of Green: High Finance, Political Money, and the U.S. Congress, written with Jie Chen and Paul Jorgensen). I first met Tom in 1981– when I took my first course with him as an MIT sophomore.

So, I can say, I’ve long harbored no illusions as to how political insiders think the politics game must be played– and what regulators are allowed to do and not do. And perhaps that understanding is the simplest one for explaining why Cordray hasn’t actually achieved all that much as CFPB director.

But allow me, just for a moment, to imagine a different Richard Cordray. One perhaps a bit less credentialed, but who had instead channelled more of this attitude during his tenure as CFPB director.