Cordray’s first target: The housing crisis

Despite the controversy surrounding his appointment, Richard Cordray is barreling ahead with his work as head of the new Consumer Financial Protection Bureau — and he’s starting with the very event that led to the creation of his agency: the housing crisis.
Richard Cordray, director of the Consumer Financial Protection Bureau. (BLOOMBERG )

On Wednesday, the new bureau released its guidelines for regulating the practices of mortgage lenders across the country. Regulators are instructed to examine whether lenders offering subprime loans, for example, closely assess whether potential borrowers are actually able to repay the loans and factor in the risks accordingly. The CFPB will also determine whether lenders misrepresent the terms and conditions of their loans — another practice that helped contribute to massive defaults — warning them to “avoid using fine print, separate statements, or inconspicuous disclosures to correct potentially misleading headlines.”

The CFPB had already rolled out a public education campaign, “Know Before You Owe,” to improve financial literacy on the consumer side as well before Cordray officially took office last week. But Obama’s recess appointment unleashed the watchdog’s full enforcement authority. Over the past few days, the CFPB also launched its first known investigation into a financial firm, probing kickbacks that were allegedly paid to PHH Corp., a private mortgage lender.

On the flip side, there’s serious concern that this extra scrutiny from the CFPB could make banks and other financial firms more anxious about making loans to potential homebuyers. As a result, the additional regulation might conceivably tighten up credit at a time when more activity is needed, exacerbating problems in a housing market that’s still recovering from the 2008 crisis.

It’s also not yet clear whether the bureau will file suit if it finds that PHH — or other financial firms that it investigates — are found guilty of violating federal consumer laws, or whether it takes up other enforcement measures instead. And even if the CFPB’s enforcement doesn’t dampen the ailing housing market, it’s also not certain whether the bureau can do much to help turn it around. (A move like mass refinancing would more likely fall under the auspices of the Federal Housing Finance Authority, as Ezra points out.) The answers to such questions could shift the contentious debate over Cordray’s appointment from the political process to the work of the watchdog itself.