The nascent consumer agency dedicated to protecting borrowers from abusive lenders, a cornerstone of the Obama administration's efforts to reform the financial industry, will not be able to regulate the kinds of lenders that helped cause the crisis if the White House doesn't meet a key deadline, federal auditors say.
Firms like New Century Financial, Ameriquest, Fremont General and Countrywide Financial -- lenders that aren't banks and fall outside the bounds of regular federal supervision -- made the kinds of shoddy mortgage loans that ultimately led to the housing crisis. The Bureau of Consumer Financial Protection, currently led by Elizabeth Warren on an interim basis, is supposed to change that by putting them under the umbrella of a robust federal regulator.
But if the White House can't get a nominee through the Senate by July, the bureau will lack the authority to supervise nonbank lenders, according to a Jan. 10 report by the inspectors general of the Treasury Department and Federal Reserve obtained by The Huffington Post. In six months, the agency officially assumes the power formally held by bank regulators. Bloomberg News first reported on the existence of the report Wednesday afternoon.
The dilemma poses a challenge to the Obama administration, which sold the agency to Congress and the industry in part based on the promise that it will help level the playing field between banks and nonbanks when it comes to government oversight. Banks have long been regulated by federal agencies and subject to regular audits. Nonbanks, like home mortgage and payday lenders, have been subject to sporadic oversight, at best. Such companies have been hit with billions in fines and legal settlements in response to accusations they engaged in abusive and predatory lending.
Adding to bankers' frustrations is the fact that the agency, even without a director, will be able to oversee consumer lending by banks with more than $10 billion in assets. Because this authority already exists with bank regulators, the consumer agency will be able to assume this responsibility in July, federal auditors said in their report. Nonbanks, though, will be off-limits.
The report puts added pressure on the White House to meet the July deadline. It has struggled to name an agency chief.
Industry officials and their allies in Congress prefer someone who will take a more relaxed approach to oversight. Consumer advocates are pushing for an aggressive regulator who will prevent the kinds of abuses that were common during the housing boom.
The White House is stuck in the middle of this fight, wanting to please its allies who helped get the agency enacted into law in the first place, and helped the administration counter critics who say it's too close to Wall Street.
But the administration also wants to name an agency head who will face limited opposition in the Senate. Created as part of Dodd-Frank, the 2010 law overhauling financial regulation, President Barack Obama hailed it as one of the top achievements of his presidency.
Under pressure, President Barack Obama tapped Warren in September to lead the agency on a temporary basis. Warren, a passionate consumer advocate, is supposed to stand up the unit before it assumes its full power in July.
The White House has two choices: either go around the Senate and tap the agency's director through a recess appointment, or pick someone the Senate will confirm.
Shortly before tapping Warren, Obama noted the difficulty he's had in getting the Senate to confirm his nominees.
"I'm concerned about all Senate confirmations these days," Obama said Sept. 10. "I mean, if I nominate somebody for dog catcher..."
"I've got people who have been waiting for six months to get confirmed who nobody has an official objection to and who were voted out of committee unanimously, and I can't get a vote on them," he continued.
Because of that difficulty, the White House "has always looked at a recess appointment as a possibility," said Michael Calhoun, president of the Center for Responsible Lending. "And they can't let the agency go without a director come July."
White House spokesmen didn't respond to e-mailed requests for comment.
Opponents have vowed a nomination fight. Observers believe that whomever the White House chooses will likely face extensive grilling and opposition by Senators who oppose the very idea of a dedicated consumer agency.
Not having a director in place by July -- and thus preventing the agency from supervising nonbank lenders -- would be a "positive" for the industry, said Bill Cosgrove, president and chief executive of Union National Mortgage Company, a nonbank lender based in Ohio. "What we're concerned about is overkill in terms of regulation," he said.
Cosgrove added that state regulators, which currently oversee lenders like his firm, have stepped up their oversight of his industry. His firm has been audited by six different state regulators in the past year alone, he said.
Though the auditors' report places additional pressure on the administration to get a director in place so the agency can police firms like Cosgrove's, and not face the wrath of bankers who will note the administration's broken promise of a "level playing field," Calhoun said he was confident that the White House will meet its deadline.
"They have to," he said.
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