The backlash against an aggressive mortgage servicing settlement reached new heights on Wednesday as lawmakers sharply criticized Elizabeth Warren of the Consumer Financial Protection Bureau (CFPB) for her involvement and two state attorneys general vocally opposed the proposed deal.
While a House hearing on the CFPB turned into an attack on the agency's role in the settlement, Republican attorneys general outside of Washington expressed dismay at the 27-page settlement term sheet offered by Tom Miller, Iowa's AG, on behalf of all 50 state enforcement agencies.
Their opposition and continued objections from lawmakers suggest the banks are gaining momentum in their effort to substantially weaken the proposed terms.
In separate interviews, Kenneth Cuccinelli, Virginia's AG, and Scott Pruitt, Oklahoma's AG, said the term sheet went too far.
"My concerns and I know other AGs have similar concerns is that there appears to be an attempt by some to essentially rewrite certain banking and servicing laws in the consent agreement," Cuccinelli said. "I and others are not comfortable with it because much of what's been put on the table rather clearly in and of itself goes beyond the authority attorneys general have."
Pruitt echoed the same concern.
"I am concerned that what started out as an effort to correct certain practices has morphed into establishing an overarching regulatory scheme that restructures mortgage loans and the mortgage loan industry," Pruitt said. "I think there are examples of mortgage servicers and other bad actors that should be held accountable for many of the loans and practices they abused but the settlement has gone larger than that and has reached a level of significant principal and loan modifications and that's unacceptable."
Cuccinelli suggested banks should not accept the initial terms from Miller.
"Banks may agree with that but I've watched too many of these corporate folks roll over and play dead in all sorts of circumstances," Cuccinelli said. "Frankly I find that disappointing but they do it for their own reasons, mostly because I think they are scared."
Both enforcement officials said that banks had made mistakes that needed to be corrected, but said the term sheet was too prescriptive by pushing principal reductions and demanding other far-reaching changes. They said other attorneys general agree.
"There was a development or impression publicly that there was somehow some consensus around all this," Cuccinelli said. "It wasn't that there was a consensus that existed and was blown apart. There was never a consensus. … The fact is when you are looking at an agreement that goes so far beyond the existing laws of any state or the federal government you are not talking about enforcing the law. … You are writing the law."
Attorneys general from New York, Arizona and Nevada are also reported to disapprove of the settlement, giving banks more leverage as they push back against the deal. Sources said banks were preparing to offer a counter-offer next week to the state AGs that would look substantially different from the term sheet.
Politically, the term sheet continues to be a hot-button topic, with Republicans using it to attack the CFPB since the agency has been involved with the settlement but does not technically assume enforcement powers until July.
During the hearing, several GOP lawmakers said Warren, who is the Obama administration official in charge of setting up the CFPB, was acting inappropriately.
"It has come to light that representatives from the bureau played an active role in the settlement discussions between large mortgage services, federal regulators, and state attorneys general," said Rep. Shelley Moore Capito, the chairman of the financial institutions subcommittee. "By statute, the bureau will not be operational until July of this year. The involvement of bureau employees in these discussions raises serious questions."
For her part, Warren said she was only providing advice.
"As you know, this new consumer agency is still getting started and doesn't have any enforcement authority," she said. "Therefore, we will not be a party to any formal settlement with mortgage servicers."
She noted that since the agency will have enforcement powers later this year, it made sense for CFPB to be involved.
"We have provided our comments, and let me tell you why: If there had been a cop on the beat with the authority to hold mortgage servicers accountable a half-dozen years ago, if there had been a consumer agency in place, the problems in mortgage servicing would have been exposed early and fixed while they were still small, long before they became a national scandal," Warren said.
But that wasn't satisfactory for House Republicans who repeatedly asked Warren to clarify her role but allowed her little opportunity to respond.
Rep. Patrick McHenry, R-N.C., said the settlement will hurt the economy.
"A number of the provisions of the term sheet could cause a crippling slowdown in that recovery," he said.
Warren responded that her involvement has been helpful.
"We do not negotiate with private parties," she said. "We've been asked for advice, congressman, and wherever we can be helpful we are not only glad to be helpful we are proud to be helpful."
Lawmakers also asked her to justify reports that she was pushing for a $20 billion fine as part of the agreement. Rep. Scott Garrett, R-N.J., criticized Warren for such suggestions.
"Have you pushed for certain dollar amount in penalty?" he asked.
Warren responded that other regulators were also concerned.
"Congressman, I know that given the level of problems that have been uncovered with mortgage servicing that the acting director of the Comptroller of the Currency has been here in Congress to talk about violation of state law and local law," she said.
But Garrett said she had no powers to advocate for a penalty.
"Tell us, what legal authority does a political appointee have in a situation like this to make recommendations with regard to civil or criminal action?" Garrett said.
The comments came even as lawmakers pushed to make changes to the CFPB. House Financial Services Committee Chairman Spencer Bachus introduced a bill that would replace the agency's director with a five-person board.