Trying to Stay Above Politics: A Conversation with Richard Cordray

It is hard to deny Richard Cordray's hiring to run the Consumer Financial Protection Bureau nearly four months ago is a flash point in continuing debates over regulatory appointments and implementing the Dodd-Frank Act.

But with all the angst surrounding his recess appointment, one can almost overlook the massive to-do list he inherited. Cordray is responsible for launching and overseeing an entire regulatory regime — over nonbanks — that never before existed. After an excruciatingly slow start during the months without a permanent director, the CFPB is now moving quickly. Under Cordray's watch, it has designated nonbanks for formal supervision, expanded its processing of consumer complaints and will soon try to succeed where other regulators have failed in streamlining mortgage forms.

Cordray has tried to move past the controversy over his hiring by reaching out to various constituencies. He has spoken at industry conferences all around the country, including his stop this past week at the Consumer Bankers Association convention in Austin, Texas, where CBA President Richard Hunt called the new agency the most accessible in Washington.

We sat with Cordray in Austin to discuss, among other topics, his view on enforcement versus rulemaking, how the CFPB can be responsive to consumers without being political and just what did Dodd-Frank mean by "abusive" practices.

There was some head-scratching after Dodd-Frank added the word "abusive" to prior "UDAP" standards to ban "unfair, deceptive or abusive acts or practices." Will the CFPB give any guidance specifically on what UDAAP means?

We have given some exam guidance around these concepts, and I think maybe we'll have more to say over time. I don't anticipate us writing a rule around UDAAP. Again, I think a lot of the law is really clear in that area, and what is maybe not clear to people because they haven't had experience with it has been specifically defined by Congress, so that is what it is. We'll continue to develop as we go.

So people will mostly have to look at your actions as the model for how this new term is defined?

I think that's probably right. The law is, I think, pretty well-defined out there, and it was pretty significantly defined by Congress as well.

Richard Hunt asked you to expand on comments indicating support for tailoring rules to different-sized banks. How do you reconcile that with the fact the CFPB — with nonbank authority — was designed to level the playing field for all.

What I have said is that as we regulate, it just makes common sense for us to think about the burdens that are being placed on thousands of institutions — many of whom we will not be examining ourselves … — and determine whether provisions that are designed sometimes at a degree of specificity necessarily make sense for small institutions that may engage in the marketplace only sporadically.

So again, that's what we're doing with the remittance rule. We're considering whether and, if so, where to set a threshold. That's reflecting the fact that many institutions may only do a remittance transaction on an irregular basis, and it's not part of their normal business. What's important is that we try to level the playing field between banks and nonbanks, who were way off in a different direction. There was something and there was nothing, and that doesn't work. But in a thoughtful, careful way, potentially writing rules that might apply differently at different levels of institutions with different business models, that makes sense. The notion that rules applicable in one consumer market are necessarily exactly the same as would apply in other consumer markets, it's much more situational than that. And I think that's true here. But the important thing is that when there are rules in place, that everybody is held to comply with them on an even-handed basis, it doesn't mean that every particular example is the same.

So is the ultimate goal to level the playing field between small and large institutions? There is obviously tension between the big banks and the small banks on that question.

Well, in most of the consumer markets, you take the largest institutions, and you're talking about 80, 85, 90% market share. I just think that it makes sense for us to consider carefully what burdens we're imposing on different types of institutions and be a little bit nuanced about that.

You come from an enforcement background, and you've talked about the advantages of using supervision as a tool. But what about your policymaking authority? What tool is more effective: writing rules, or enforcing them?

To us there are two different aspects of the rulemaking. There are certain rules that Congress has specified we have to adopt. Many of them have very specific deadlines, many of them have provisions that would kick into play if we were not to meet those deadlines. So it's very important that we do because otherwise institutions would have to go in a different direction and veer back when the rules were written.

Then there are areas where we have rulemaking authority but there's not a particular mandate for us to do something. It's going to be discretionary for us as we see it. On the mandatory rulemaking agenda, there's a lot for us to do in a short time that puts some strains on our ability to deliver, and it puts a premium on us being able to think more quickly, gather data more quickly.

Then there are other issues where we intend to be more broadly consultative and take our time to think through what's the right approach. Rulemaking is a very powerful tool. It's essentially us standing in the shoes of the legislative branch and specifying rules of the road that people have to comply with … It also is an effective tool in some respects if you're trying to affect an entire market.

Enforcement has a deterrent effect, word gets out. But there's also a certain skepticism about enforcement, and I think it's well-placed, which is how easy is it going to be to enforce against lots of individuals in a given space? In some industries I've seen people feel like there's a lot they can get away with … and that's not a good thing. The supervision-examination function is very interesting because it gives us an immediate tool to go in quickly wherever we wish to go. It gives us access to all the information to size up the problem.

Speaking of regulations, where are you on the "Qualified-Mortgage" — or QM — rule?

We recognize that there are links in the chain here, that it's important for us to proceed more quickly because the [separate Qualified Residential Mortgage] rule is … built on and affected by the QM rule. Mortgage markets are waiting on both. We had said …that in the first half of the year we would try to come out with the QM rule, and at this point that's our time frame.

It's a complicated situation, with the QM rule … The mortgage market is so unnaturally depressed at the moment. It was so unnaturally heated before the financial crisis that it feels like we haven't had a natural or sort of sustainable mortgage market for a number of years. And so recent data is not very illuminative on where the mortgage market is going, and that feels like a hard set of calls that we're going to have to make around that. We want to make sure we get that as right as we can, so we're trying to be careful.

How big is your rulemaking staff at the moment, and what are its priorities?

We have a reasonably sized rulemaking staff, although it feels small compared to the real burdens over the next 10 months in particular. They're quite anxious about meeting all of our obligations.

Our rulemaking process is more complicated than most because we also have the [Small Business Regulatory Enforcement Fairness Act] panels that we're required to convene in any situation where we can't certify that there's no significant effect on small providers.

We pretty much absorbed the entire consumer rulemaking group from the Fed, so there's a lot of experience there. But there are a lot of difficult, complicated issues that they're intended to address in a short time frame.

Integrating [the Truth in Lending Act and the Real Estate Settlement Procedures Act] is a very high priority for us, and we put a lot of time and effort into it and gotten a lot of feedback that needs to be sifted through. We're going beyond the mortgage application to the final closing documents and really trying to … to reduce the overall burden. That's a major undertaking, and QM is a major undertaking.

It's a full plate of rulemaking for our folks. I think they're up to the task. I actually think that I would say, pound-for-pound, I think we have the strongest set of regulatory attorneys to do this work that you could find anywhere. But it's a significant workload.

Banks are especially concerned these days about fair lending enforcement. How does CFPB fit into the-fair lending picture?

Under the statute … we have authority under the [Equal Credit Opportunity Act], but we do not have authority under the Fair Housing Act, so we inevitably have to work together with HUD and with the Justice Department, which we have processes in place to do.

Our fair lending office, which was established by law, is engaged in both making sure that supervision is going to be effective in this area, and then thinking about enforcement where that's appropriate. I know they're working on some matters jointly with the Justice Department already, so I think that we will try to be careful and sensible about what we do.

Would you say fair lending is the main focus of your enforcement team?

It's hard to say. I want to be a little careful about what I say about pending investigations, so I don't think I have any particular answer.

How do you stay responsive to what's happening in the market without getting swept up in politics, or being accused of that?

Our lifeline on this, and it's very important for us to focus very carefully on it, is we have this consumer complaint function. We're hearing directly from people, and frankly that will build over time as there comes to be a more broad awareness of us out in society, which I would say is only in the early stages at this point.

Look, it is 2012, it is a presidential election year, but that shouldn't make any difference to our work, and it shouldn't make any difference to the way people regard us. We have a job to do. I think it's an important job, I think it's a great job, we are enthusiastic about our mission. And I feel that the more we're able to do, the more we're able to show that we can make a difference in these markets, the stronger and deeper our foundation becomes. And so we feel a sense of urgency around that, but I think anybody worth their salt should always feel a sense of urgency.