01/05/2012 12:35 pm ET Updated Jan 05, 2012

Richard Cordray Recess Appointment May Paradoxically Help Banks

WASHINGTON -- President Barack Obama's recess appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau has underscored the extreme degree of Republican obstructionism targeting the new agency. But the move also brings to light some more obscure fault lines within the financial industry itself -- divisions with significant implications for consumers' pocketbooks.

Without a director, the CFPB's regulatory authority only extends to actual, formal banks, those financial institutions that accept deposits insured by the FDIC. But lots of companies offer all kinds of financial services without accepting deposits, including some of the most predatory firms targeting consumers: payday lenders, check-cashing services, specialty mortgage shops, debt collectors and other firms that go after customers who do not have a traditional bank account.

These "non-bank" lenders compete directly with ordinary banks in a host of ways; payday loans and overdraft fees, for instance, are both techniques to charge much higher interest rates to consumers who need money to survive between paychecks. But payday loans are generally offered by a non-bank, while overdraft fees are charged by traditional banks.

Consumer advocates have long raised objections to both practices, arguing that they frequently feature predatory interest rates and use deceptive or even fraudulent marketing and sales techniques.

But without a director, the CFPB can only crack down on overdrafts -- payday loans are exempt. And that puts banks at a competitive disadvantage, while leaving non-bank institutions and any exploitative practices without federal oversight. And so despite the great hue and cry that has erupted from Senate Minority Leader Mitch McConnell (R-Ky.) and major defenders of Wall Street banks in Congress, in some sense the recess appointment of Cordray is actually good for banks.

"We see this as a slight positive for banks as the CFPB already had the authority to regulate banks and enforce existing laws against them," wrote Keefe Bruyette & Woods analyst Brian Gardner in a Thursday note to clients. "Nonbank lenders were able to avoid CFPB regulation until a Director was in place (subject to the above challenges). The CFPB could level the regulatory playing field to the benefit of banks."

For much of 2011, the financial industry's lobbying with regard to the CFPB was divided. Big Wall Street banks that had offered predatory subprime loans during the housing bubble channeled much of their effort to weaken the new agency through the U.S. Chamber of Commerce, a front-group for big corporations. Those anti-CFPB efforts were joined by smaller lobbying organizations representing check-cashing agencies and payday lenders. Many organizations representing smaller banks took a more nuanced or cautious approach, offering to work with the bureau and its founder, Elizabeth Warren, instead of trying to dismantle it and block its authorities.

But for several months, the American Bankers Association, an umbrella group representing banks both large and small, has been pushing Congress to weaken the agency. The ABA's top priority, which has been advocated strenuously by Republicans, is to alter the CFPB's structure and tie up its rule-making and enforcement efforts in a maze of bureaucratic red tape. The legislative efforts had little chance of passing on their own, and so the ABA and congressional Republicans had hoped to force the administration's hand by holding hostage the regulation of non-banks and refusing to hold a vote on the Cordray nomination. The recess appointment eliminates that leverage.

So despite the benefits to banks from the Cordray appointment, the official statement from ABA President Frank Keating was scathing. "The controversial nature of today's recess appointment reinforces the banking industry's concerns about the Bureau's structure and lack of accountability," Keating said. "It's critical that Congress strengthen accountability at the CFPB by instituting a board or commission to address the director's unchecked authority to make decisions that could limit financial choices available to consumers."

That statement represents primarily the demands of the biggest banks in the ABA coalition. Among traditional, deposit-accepting banks, the larger banks most frequently engage in consumer protection violations and thus have the most to lose from a powerful consumer agency. Community banks were almost entirely absent from the entire subprime lending debacle, and the Independent Community Bankers Association, an organization that exclusively represents small banks, isn't resisting the Cordray appointment. The group hasn't taken an official position on the recess appointment, and a spokesperson told HuffPost, "From the onset of the financial reform debate, ICBA consistently preferred a more balanced structure for the CFPB and fought to ensure that the nonbank providers of consumer financial products and services were included under the same rules, oversight and examination as banks."

Nevertheless, there is some legal dispute as to whether or not the recess appointment will, in fact, give the CFPB new powers over non-banks. While many legal experts expect the appointment itself to stand up to a legal challenge, the authority over non-banks may not.

"Dodd-Frank limited the CFPB's authority to regulate nonbanks until a Director is confirmed by the Senate," wrote KBW's Gardner. "Technically, Mr. Cordray has not been confirmed, so we expect a legal challenge regarding the scope of his legal authority."