Why Ethics Charge Against CFPB Vet Raj Date Is Weak

WASHINGTON — Ethics concerns raised by House lawmakers about Raj Date, the former No. 2 at the Consumer Financial Protection Bureau who left to form his own firm, appear overblown, according to ethics experts and even some of his accusers.

The House Oversight and Financial Services committees raised questions about Date in a letter to the CFPB last week, suggesting he is inappropriately using his inside knowledge about the creation of the bureau's mortgage rules to benefit his company, which will specialize in offering new consumer products.

Yet some of the panels' concerns appear to be based on faulty information. The charge that Date and others at the firm, Fenway Summer, will lobby the CFPB for clients, is erroneous, based on the services the company says it provides. And many observers view Date's new role as normal and acceptable practice for a former regulator.

"If he isn't representing clients before the agency or telling companies how to circumvent agency rules, we don't see a big problem here," said Michael Smallberg, an expert on "revolving door" issues at the Project for Government Oversight, a nonpartisan group focused on ethics. "We're much more concerned about government alumni who use their inside connections to weaken agency policies."

Smallberg along with Richard Painter, a former chief ethics lawyer for the second Bush administration, were quoted making critical comments about Date's work in a June 19 article published by the Washington Examiner, a conservative daily paper based in Washington, D.C. Their quotes were cited by House lawmakers in their letter to CFPB Director Richard Cordray.

Painter's quotes in the article are the most inflammatory, describing Date's firm as an "extortion racket."

"It gets me pretty upset," Painter told the Washington Examiner in a quote cited by the committees. "It's almost like a protection racket. You hire the alumni of the agency and they'll call up their buddies in the agency to call off the dogs."

Yet that view appears based on a misunderstanding about Date's firm, which does not lobby the CFPB on behalf of itself or clients. In subsequent conversations between Painter and American Banker, it is not clear Painter still sees a problem.

Date formed the firm with other former top CFPB officials this spring after he left the agency in January. Unlike other consulting firms that advise banks and other companies on how to deal with compliance and enforcement issues with regulators, such as the firm Promontory Financial Group, Fenway is designed primarily to offer financial products of its own while also providing additional advisory services to other institutions seeking to create new consumer products.

In an interview, Date made it clear the firm does not intend to deal with the CFPB directly, or help others work out issues with the agency.

"I can't influence what the CFPB does," Date said. "To influence the agency, you would have to lobby the agency, or represent clients before the agency. And we do neither."

In an interview and subsequent e-mails, Painter said that if that is the case, he is no longer as concerned.

"This is not the arrangement described to me … by the Washington Examiner," Painter said in an e-mail exchange. "I do not have concerns with what is set forth" by American Banker.

In a follow-up phone conversation, Painter said that he has never independently investigated Date, and his opinion was based only on the conduct described to him.

"I have never formed an opinion of what he has done or not done," Painter said. "The opinion I gave was about the conduct described to me by the Washington Examiner. No independent source has verified that conduct."

If Date's firm is not lobbying the CFPB, he sees less reason for worry.

"I have a much lower level of concern if people in the company are not representing back to the agency," Painter said.

While citing both Painter and Smallberg, House lawmakers in their letter appeared focused on a somewhat different issue: that Date's firm will build a business based in part on offering "non-qualified" mortgages. During his tenure at the CFPB, Date was one of the principal officials at the agency helping to finalize a slew of mortgage rules, including the definition of the "qualified mortgage," a set of ultra-safe loans that must meet certain underwriting criteria.

Banks have raised concerns that the QM definition is too restrictive, and that lenders may be afraid to make loans that fall outside that definition because they will face greater legal liability. But CFPB officials, including Cordray, have insisted that there are ways for banks and other lenders to make profitable non-QM loans.

In their letter, lawmakers warned that Date's firm will be in a position to take advantage of his inside knowledge about the drafting of the QM rules in order to be able to make non-QM loans.

"Simply put, it appears that former CFPB employees are now offering financial products in a market sector created by the very rules they were in a position to influence while working in senior leadership positions at the CFPB," says the letter, which was signed by GOP Reps. Darrell Issa, Jeb Hensarling, Shelley Moore Capito, Jim Jordan and Patrick McHenry. "This conduct raises serious questions about the integrity of the CFPB's rulemaking process and the conduct of some of its most senior former officials."

The unspoken, but heavily implied, accusation is that Date and others somehow influenced the creation of the QM rule so that they could take advantage of it later.

Jeff Emerson, a spokesman for Hensarling, who chairs the Financial Services Committee, said the lawmakers would not be as worried about Date's firm offering advice to clients and others.

"It's a concern that these individuals were heavily involved in writing this rule that others have said is a very strict rule, and very limited space for those that originate non-QM loans," he said. "Fenway Summer seeks to become the largest non-QM originator in the United States. It's not just offering their expertise, they are going to originate non-QM loans themselves."

But Date denies anything improper, saying it would be impossible for him or other agency officials to guide the QM rule to a specific outcome, or maximize it in such a way to make a profit.

"I can't imagine a way to manipulate a federal rule-making for your own personal benefit," he said. "And I certainly know I didn't."

He added: "There is no secret QM rule. Agency rulemakings are done in full public view. Congress required the rule. The Fed proposed the rule. And then there were literally thousands and thousands of public comments. After all of that, the notion that there is something available under the surface and magically visible only to me is just not true."

Outside analysts agree that Date does not appear to be doing anything unusual or inappropriate.

"A fair number of Republicans hear the word CFPB and immediately start seeing hobgoblins and ghosts," said Reginald Brown, vice chairman of the financial institutions practice group at WilmerHale and a former White House counsel during the Bush administration. "In this instance, it doesn't strike me that there's anything out of the ordinary about what Raj appears to have done."

Edward Kramer, executive vice president of regulatory programs at Wolters Kluwer Financial Services, said there is "nothing that indicates" that Date acted improperly.

I do not have "any sense that occurred," he said, referring to improper influence over the QM rule. "The whole revolving door question is a much broader question."

Indeed, there is a larger debate about what happens after officials leave government service, including Congress. It should be noted, for example, that all five of the lawmakers that signed the letter have former staff that now lobby Congress on behalf of the private sector.

Some don't see it as a problem at all.

"Not only do I not find it objectionable, I think it's extremely beneficial for officials to move between the private sector and government," said Tony Fratto, managing partner at Hamilton Place Strategies and a former Bush administration White House and Treasury official. "My experience is that some career officials who never worked in the private sector really don't understand how firms work, and conversely, people who have only been in the private sector are bewildered about government. And that goes for all three branches of government. It might be hard to believe, but this place would be worse if everyone would be forced to stay in their boxes. "

But not everyone is prepared to let Date off the hook.

Mark Calabria, a former Republican Senate staffer who heads financial affairs at the Cato Institute, said Date's post-CFPB employment "raises issues."

"It is a thin line between providing compliance services and providing the underlying products, such as [a] non-QM loan," he said. "He is clearly going to have an advantage over competitors in the non-QM space that derives from his work on the rule."

Still, Calabria acknowledges it's a "tough call" and "seems minor in the grand scheme of things."

"Most of D.C. makes a living off what they've learned in government," Calabria said.

But some noted that it's strange that conservative lawmakers like Hensarling and Issa are targeting Date, who came from the private sector before joining the CFPB and is well-respected within the banking community. (He previously worked for Capital One, among other private-sector employers.)

"That is one of the great ironies that pretty market-oriented guys would be raising questions about one of the most market-oriented people to have worked at the CFPB," said Brown.