CFPB Chief Cordray Will Have a Big Voice at FDIC

WASHINGTON — Richard Cordray is center stage not just at a brand-new regulator. The director of the Consumer Financial Protection Bureau will also play a crucial role at an agency born of bank runs and the Dust Bowl.

Under the Dodd-Frank Act, the CFPB director sits on the Federal Deposit Insurance Corp. board of directors. That means Cordray, whom President Obama recess-appointed over GOP objections, will vote on a broad array of supervisory issues from the Basel capital regime to the proprietary trading ban known as the Volcker Rule.

Like everything CFPB-related, Cordray's FDIC seat is turning heads. Critics of the bureau question what he will add to a board with a focus on safety and soundness regulation, while others say a consumer-oriented perspective has value.

Meanwhile, some say the controversy surrounding his hiring could have repercussions not just for the CFPB but also the FDIC.

"The primary responsibility of the bank regulatory agencies is to ensure the safety and soundness of the banking system. That being said, how I might envision Cordray playing out in this kind of an arena is to recognize for the board that there are potential consumer implications for what the regulators do with regard to, say, Basel or liquidity requirements or the Volcker Rule," said Kevin Jacques, a finance professor at Baldwin-Wallace College in Berea, Ohio, and a former Treasury Department official. "Cordray has the potential to bring a different mind-set to the FDIC board."

Cordray, a former Ohio attorney general, is expected to attend his first FDIC meeting Jan. 17, when the board is scheduled to propose new stress-testing requirements mandated under Dodd-Frank.

Several observers questioned Cordray's addition to the board, arguing the bureau's expertise will not always be relevant to what the FDIC is doing.

John Dugan, a former comptroller of the currency and FDIC board member, said Cordray could take particular interest in a pending rule requiring lenders to retain 5% credit risk of loans they securitize. "It's going to have an impact on consumers. But is he going to have a view on Basel III or the Volcker Rule?" said Dugan, a partner at Covington & Burling. "There is some overlap with consumer protection, but the lion's share of what the board does is about safety and soundness and resolving failed companies."

Wayne Abernathy of the American Bankers Association was more explicit. "We've always been concerned that it's kind of an odd fit," said Abernathy, the ABA's executive director of financial institution's policy and regulatory affairs. "The FDIC board historically has included chartering authorities. That makes sense, because you can charter a bank, but if it doesn't get insurance it doesn't happen. … What is it that the consumer bureau brings to the FDIC? That's never been adequately answered."

Others disagreed, saying the FDIC's backing of depositors gives it more of a consumer orientation than other safety and soundness regulators. They also note the FDIC's active role in consumer protection issues during the financial crisis under Sheila Bair and Acting Chairman Martin Gruenberg. (Under Dodd-Frank, even though the CFPB writes the consumer rules for all banks and nonbanks, the FDIC still supervises and enforces compliance at its institutions with assets of less than $10 billion.)

"The FDIC is about more than just safety and soundness. It has a crucial prudential and consumer protection role. If the past three years didn't illustrate that, nothing did," said Travis Plunkett, legislative director at the Consumer Federation of America. "In that context, Director Cordray adds an essential element to the FDIC's decision-making process. He brings consumer expertise to the enforcement and supervision role that the FDIC plays with regard to consumer protection laws."

In a briefing with reporters Thursday, Cordray said he can provide a point of view on issues facing the FDIC that other board members may not. "This bureau brings a consumer perspective, which is arguably different or at least something of a different angle from the other banking agencies, although we have been cooperating very effectively with the FDIC thus far," he said. "They care a lot about consumer protection, and our folks are working very well with their folks. But I do think that's part of why we were placed on that board."

His is just one of five votes, but Cordray suggested his presence on the board provides another forum for discussion between prudential regulators and the bureau — on both consumer and safety and soundness rules. The FDIC has "been very helpful at reaching out to us, and we expect to play a full participating role on that board, understanding, though, that it's somewhat different from our normal strike zone here at the consumer bureau," he said.

"On the other hand as well, I would add it's important for us at the bureau to be coordinating closely with the federal prudential regulators," Cordray continued. "They have safety and soundness as their primary concern; we have consumer protection as our primary concern. We need to be mindful of one another, both us helping them understand where we're coming from, and them helping us understand where they're coming from. The fact that I serve on the FDIC board I think is helpful in creating that perspective for us."

Before Dodd-Frank, the five-member board consisted of a chairman, vice chairman, the comptroller, an independent director and the head of the Office of Thrift Supervision. The reform law substituted the CFPB director for the OTS position. (Dodd-Frank eliminated the thrift regulator.)

There have been at least two other instances where an FDIC board member was installed without first following the standard confirmation process. Starting in late 1998, former Comptroller of the Currency John D. Hawke Jr. served for 10 months under a recess appointment before being formally sworn in the following year. M. Danny Wall, the first OTS director, became an FDIC board member in the late 1980s when his duties as head of the former Federal Home Loan Bank Board were transferred to the then-new thrift regulator.

With continued uncertainty about the nominations for the other seats, the CFPB director's addition brings the size of the board to just four members. Still, Cordray arrives on the board as it faces a demanding workload over the next several months, including efforts to finish regulations on Basel III, risk retention and the Volcker Rule.

Yet Cordray's actual record dealing with safety and soundness policy appears thin.

In Ohio he had more experience with credit underwriting issues not as attorney general, but as the state's treasurer from 2007 to 2009. Then, he developed a "linked-deposit" program through which state funds were deposited in Ohio banks at below-market interest rates; in return, those institutions provided favorable loan terms to local farms and small businesses.

"While he doesn't have a lot of background" with safety and soundness regulation, "he is an incredibly quick study," said Mike Van Buskirk, president and CEO of the Ohio Bankers League.

"He dealt with banks fairly frequently, and as the state's banker, he dealt with their safety and soundness from the standpoint of meeting the qualifications as a depository for the state. On safe lending and examinations, those are not things to my knowledge that he has ever dealt with professionally, but he has dealt with them tangentially."

Steve Wilson, CEO of LCNB National Bank in Lebanon, Ohio, said Cordray "was very good at reaching out to banks and working with banks on programs … in our state."

In Thursday's briefing, Cordray said he is not a neophyte at safe and sound banking. In roles as treasurer, he said, "I have handled billions of dollars of investments, billions of dollars of debt issuances. I've performed banking and other cash-flow functions, so I have a banking background."

But, with the Obama administration having appointed Cordray without Senate confirmation, potential challenges to his and the bureau's authority are raising questions about the impact on the FDIC. (Dodd-Frank states that the director's authorities do not begin until confirmation, but some legal experts have said a recess appointment is sufficient.)

Cordray could never be a tie-breaking vote on the current FDIC board, which has four members, but industry representatives say policies at both agencies could still be vulnerable. "To the extent that he makes decisions on the FDIC board and it's then found that he was invalid, I would hate to have that uncertainty on the FDIC or at the CFPB," Wilson said.

Abernathy said banks hit with FDIC enforcement actions may challenge them on claims the board's ruling should not have included Cordray's participation. "If I were a banker, I would be looking at that possibility," Abernathy said. "Anyone who is a target of an enforcement case is going to look for whatever avenues they can to question the legality of it."

Cordray has dismissed concerns about his legal authority. "With a [CFPB] director in place — and I believe validly in place — we now have our full authorities to move forward," he said in remarks Jan. 5 at the Brookings Institution.

Supporters of Cordray's FDIC seat say it could shake up board deliberations in a positive way.

"They now have a similar mind-set in how they approach safety and soundness. That commonality of mind-set is dangerous," Jacques said. "When he gets up to speed on these issues, I do expect [Cordray] to remind the other members of the board of the potential implications to consumers of their safety and soundness regulations."

Bankers have long countered that safety and soundness regulators should have similar influence over consumer rules, and supported proposals for the bureau itself to be governed by a board. Even though Dodd-Frank allows for consultation by the other agencies to give input on consumer policies, the CFPB ultimately sets consumer policy by itself.

"It's almost as if safety and soundness is not allowed to influence consumer protection, but consumer protection is allowed to influence safety and soundness," Abernathy said.

(The Financial Stability Oversight Council, which includes the FDIC, CFPB and other bank regulators, can overrule the consumer agency's actions with a supermajority vote.)

Some said the FDIC board may prove to be an opportunity for two-way discussions.

"At least it provides a forum where [Cordray] meets with bank regulators, so when there is a [CFPB] rulemaking that will affect the smaller community banks, they can all discuss the impact," Dugan said. "But that will take up a minority of what the FDIC board does."