Treasury Secretary Timothy F. Geithner pushed back Tuesday against lawmakers questioning the new Consumer Financial Protection Bureau role in negotiating a settlement with mortgage servicing firms whose shoddy practices and flawed foreclosure paperwork came to light last fall.
Republicans on Capitol Hill have said that the CFPB should not participate in the talks because it has no permanent director and because it won’t have regulatory authority until it opens in July. Sen. Richard C. Shelby (R-Ala.) recently accused the bureau’s acting director, Harvard law professor Elizabeth Warren, of leading what “appears to be nothing less than a regulatory shakedown” of some of the nation’s biggest banks.
Geithner said during testimony on Capitol Hill that he had asked Warren to advise the federal agencies and state attorneys general collaborating on the pending settlement on how to design appropriate mortgage servicing standards.
In a separate letter Tuesday to Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, Geithner said that the CFPB would “not be a party to any formal settlement with mortgage servicers.” But he said that bureau officials had played an active role in the settlement talks because the new watchdog will have “significant authority” in overseeing the mortgage servicing industry.
In a statement, Warren hit back against the notion that a watchdog created to help consumers shouldn’t participate in an issue that affects potentially millions of Americans.
“Political attacks against federal and state law enforcement officials for responding to alleged legal violations are dangerous,” she said. “We know what can happen when laws aren’t fairly or consistently enforced because of political pressure, and it doesn’t end well for American families, for honest businesses, or for the economy.”
The new bureau, which has been among the most aggressive agencies in seeking penalties against the servicers, has people with wide knowledge of the mortgage industry on its growing staff. Several months ago, Richard Cordray was the Ohio attorney general and had sued several servicers for alleged deceptive business practices. Now he heads up the consumer bureau’s enforcement division.
The controversy over the bureau’s role in resolving the mortgage foreclosure mess comes as Warren is to testify before Congress on Wednesday for the first time.
It also underscores the philosophical battle over the proper role for the consumer bureau.
Most Republicans opposed the creation of such an entity last year, saying that the broad powers and independent funding given to the bureau would constrict credit to consumers and create an unnecessary layer of regulation for businesses. They have proposed changing its funding structure so that it would have to rely on appropriations from Congress rather than the Federal Reserve. Rep. Shelley Moore Capito (R-W.Va.) chairwoman of the subcommittee holding Wednesday’s hearing, has said she called the session in part because of “reservations about the bureau and unintended consequences it could have on consumer choice in financial products.”
But Democrats and consumer advocates see the bureau as a key component of preventing the widespread abuses by lenders in recent years. Warren has said that the bureau is an essential part of the post-crisis regulatory landscape — a case she plans to make again Wednesday.
“Under the old system, seven different federal agencies were responsible for consumer financial protection,” Warren plans to say in part of her 34-page prepared remarks. “The tangle of seven agencies failed to create effective rules and left gaping holes in oversight. . . . The CFPB will be directly responsible to the public for performing those core functions.”
Staff writer Dina Elboghdady contributed to this report.