Elizabeth Warren has spent much of the past year arguing the Consumer Financial Protection Bureau (CFPB) is not as scary as banks think. But as she steps aside, will that really be the case?
Warren, the bureau's de facto leader after passage of the Dodd-Frank Act, has favored guidance over prescription, said product bans are not part of the agency's early plans and advertised better disclosures as a boon to banks as well as consumers.
Yet some saw President Obama's choice of Richard Cordray, the CFPB enforcement chief and a former state attorney general with a strong consumer protection record, to lead the bureau as sign that banks' worries could be justified.
"The industry is interested in the question of which comes first: the regulatory guidance or the enforcement that makes an example, and sends a message," said Jo Ann Barefoot, a co-director of Treliant Risk Advisors. "I have long been predicting that they're going to do some of both, but this might hew a little more toward the enforcement agenda."
The bureau's agenda in the 12 months since the reform law was enacted has been something of a tightrope walk.
Credited with inventing the bureau, Warren clearly intended to get it off to a strong start. Yet the formal launch does not come until this Thursday. The administration - unable to nominate Cordray until nearly a year later - installed Warren more as a caretaker than as a long-term executive, and the law limits the bureau's authority if it lacks a formal director.
Still, without clear leadership, the bureau was able to make the most of its first year.
Warren, facing ample skepticism from bankers and Republican lawmakers, embarked on a tireless outreach campaign and in the process won fans in the industry. She led efforts to staff lower-level positions and build the bureau's technological infrastructure, as well as appear on the bureau's behalf at hearings where lawmakers questioned the whole concept of a consumer agency.
The regulator's initial steps included not just nuts-and-bolts initiatives but also policy moves as well, though each was tailored to fit the bureau's restricted authority. The bureau urged banks to support simpler disclosures, seeking comment on model forms for mortgage borrowers.
Allowed, without a director, to craft policy for its supervision of banks larger than $10 billion in assets, the bureau issued a notice of principles for its supervision program. It also issued an early proposal related to which types of nonbanks it will monitor for consumer compliance. Yet nonbank supervision cannot begin in full until a director is confirmed.
Kevin Petrasic, an attorney at Paul, Hastings, Janofsky & Walker LLP, said the bureau — facing a host of critics — will likely still have to be careful not to exceed its authority for the foreseeable future, even if Cordray is confirmed.
"The key will be the ability of top managers to be able to navigate the narrow corridor to fulfill the mission of the agency, but at the same time protecting the agency's integrity from attack that it has gone too far or that it is being arbitrary and capricious, or inconsistent," Petrasic said. "One misstep is almost assuredly going to bring significant criticism."
Observers said the last 12 months may just be a trial run, and speculation over what kind of consumer regulator Cordray, who was nominated Monday, would lead over a longer term is the now the hot topic.
Stacie McGinn, a partner at Simpson Thacher & Bartlett in New York, noted Cordray's background as a state official could lead him to endorse greater authority for states to protect consumers, which would be allowed under Dodd-Frank. For example, the bureau would be required to propose a rule when a majority of the 50 states support a resolution backing the rule.
"There's quite a bit in Dodd-Frank that suggests that states are going to have a more prominent role than they have in the past," McGinn said.
With Republicans saying they will still oppose any nominee without structural changes to the bureau, it is still unclear when and how the administration will succeed in getting Cordray confirmed. But the bureau does not have to wait for a confirmed director to assume some new responsibilities in its second year.
On Thursday, regardless of the status of his nomination, the bank regulators who have traditionally handled consumer-protection policy will officially hand several authorities to the bureau, including the job of overseeing large banks — totaling 111 — for potential consumer abuses.
Barefoot said a challenge for banks will be preparing for how the bureau will look for so-called "unfair and deceptive acts or practices." The consumer agency will take over responsibility for UDAP rules from other regulators.
"There is a widespread expectation that" the bureau "will seek to do some-high profile enforcement work as early as they can, and that it will probably be or include UDAP," Barefoot said.
Petrasic said the bureau will benefit from the scores of experienced examiners from other agencies who are being transferred to the bureau.
"Most of them come at it from a perspective that is fully mindful of the regulatory setting and the context and the parameters in which they can operate," Petrasic said. "And at the same time, I think these people are dedicated to what they do, they've chosen consumer financial protection as their career path, so they understand what the tensions are."
Meanwhile, there are still unanswered questions over how the bureau will split resources between oversight of banks and oversight of nonbanks. While the CFPB cannot yet regulate nonbanks without a director, it has indicated plans to cast a wide net for the types of nonbanks it will monitor.
"Hopefully, the nonbank and bank supervision programs are consistent and dovetail," Petrasic said.
But that will take time. While the bureau has reiterated its commitment to regulating nonbanks, amid concerns that banks will still get tougher oversight, some observers say that will not be on the agency's radar screen for awhile.
"It's not a day one, two, three, or four issue," said Jeffrey Taft, a partner with Mayer Brown LLP.
The details about which specific products the new bureau will target are also unclear. While Warren recently said the bureau has not found products it wants to ban from the outset, observers expect mortgages — and to a lesser extent credit cards — to get more scrutiny.
Most expect the bureau to continue its focus on improving disclosures both for home loans and credit cards.
Some observers say the agency can attract supporters in the industry if it can carry through on its stated intention to consolidate various disclosure requirements into a single form, which would in turn ease banks' compliance burden.
Shrinking the agreement to one page or requiring creditors to use even plainer language are measures that would likely gain widespread support, Taft said.
"It's something tangible that the average consumer and the average borrower would appreciate," Taft said.