The Washington PostDemocracy Dies in Darkness

A watchdog grows up: The inside story of the Consumer Financial Protection Bureau

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In late 2011, a quiet revolution took place at the corner of 17th and G streets NW.

About 500 federal workers were vacating the drab, 1970s-era headquarters of the Office of Thrift Supervision. The agency had just been scrapped for its role in the financial crisis, which in retrospect seemed almost inevitable: Its primary mission had been to keep banks solvent, and its budget depended on how many of them chose it as their regulator, leading to almost criminal complacence.

The building’s new occupant was supposed to fix all that.

The Consumer Financial Protection Bureau, created by the Dodd-Frank financial reform law, was designed as a Google-era regulator: a data-obsessed start-up, forever iterating, laser-focused on the safety of consumers rather than the soundness of banks. With a culture of creativity and corps of true believers, it would avoid the kind of coziness that had paralyzed its predecessors in the face of rampant wrongdoing.

The new sign on the outside of the building bore a logo unlike any in federal Washington, with “CFPB” in hip lowercase letters. The bureau’s leaders imagined a lobby welcoming to the public, full of financial education materials; for the time being, it had placards describing the agency’s guiding principles: “Serve. Lead. Innovate.”

The reality was not so idyllic.

For nearly two years, as political infighting and industry resistance held up the confirmation of its first director, the bureau operated under a chilling cloud of uncertainty. Perhaps predictably, it failed to escape the byzantine rules that hobble every other agency. And its strong-willed staff, drawn from other agencies, private companies and consumer advocacy groups, got bogged down in constant fights over the mission.

“They started out with such a complete rethinking of everything,” said Jo Ann Barefoot, a former deputy comptroller of the currency who tracks the CFPB for a financial services consultancy. “I think they were more clear on what they were not than what they were.”

The instability and red tape drove some of its most talented hires back out the door — many wooed by consultancies and law firms willing to pay top dollar for their newfound expertise.

“The bureaucracy finally caught up with me,” said one former high-ranking official who left and asked for anonymity in speaking about former colleagues. “There's so much overhead in running a government agency that's required by Congress that it cuts into what's already a 16-hour a day job. You’ve got to have the tolerance that 40 percent of your time will be wasted on things government says has to happen.”

The Senate finally confirmed Richard Cordray as director in July. Since then, a torrent of enforcement actions has rolled out of 1700 G St., from an $80 million judgment against Ally Financial for racial discrimination in auto lending to a sweeping case against Ocwen Financial for deceptive mortgage-servicing practices. The activity reflects the strength of a maturing agency that has fundamentally changed how financial institutions understand the power of their customers to fight back.

It also obscures the internal story of conflict and turmoil that led to this point — and how the CFPB still has to confront the creeping malaise of the federal bureaucracy it set out to reinvent.

Starting from scratch

The bureau began as an idea published in 2007 in Democracy Journal, a small lefty quarterly. Its author, a Harvard Law School bankruptcy professor named Elizabeth Warren — who has since become a Democratic senator from Massachusetts — described a feisty “Financial Product Safety Commission” whose emissaries would be as familiar to Americans as firefighters.

The epic financial crisis of 2007-08, with its roots in unchecked lending by America’s financial sector, brought her idea to the fore; President Obama embraced the plan in June 2009 as a core part of overhauling the financial industry.

Warren’s manifesto became Wally Adeyemo’s best recruiting tool. Once Dodd-Frank passed in 2010, the young deputy executive secretary of the Treasury began laying the groundwork for the agency, then housed in Treasury’s basement. He handed the article to prospects, including Leandra English, a special assistant at the Office of Management and Budget, who joined up.

“It shocked me that something like the bureau didn’t already exist,” English said. “The need for it was so obvious. I knew I wanted to help build it — it didn’t matter that I had little idea what I’d be doing.”

Officials tasked with the setup had little other guidance. Consultants provided them with a binder of case studies on how other agencies had been launched. But most of these were either bad examples, such as the Department of Homeland Security’s disintegration into feuding fiefdoms, or not applicable. Even the Securities and Exchange Commission, built in the aftermath of the Great Depression, didn't have the immense range of mandates granted to the Bureau.

In particular, the binder was silent on how to hire people. Applications poured in from idealistic young lawyers, and Warren — then a special adviser to the Treasury and the CFPB’s de facto leader — brought on recruits from Harvard. The bureau’s headhunters especially liked passionate applicants who had some personal experience with the financial crisis -- somebody they knew lost a house or job -- and an intense devotion to the agency's mission.

But the founders also knew that they needed to send a message with some high-profile hires. “When you’re the new kid on the block, you kind of have to prove yourself,” Adeyemo said. “They think, 'we've been doing this for a long time. Do you have the talent to do what we’re doing?’”

They got their big shots. Catherine West, who had led Capital One’s U.S. credit card business, came on as chief operating officer. Len Kennedy, general counsel at Sprint, joined in that role. Holly Petraeus, a celebrity general’s wife who had worked on financial literacy for military families, would head the Office of Servicemember Affairs.

Soon the ballooning staff expanded into government space in a nondescript office building. New recruits would show up to no desk, no phone and way too much to do. All-hands meetings were held in the elevator lobby, with people sitting on the floor while Warren gave pep talks. Even senior hires often started out in a big, windowless room called “the cave.” But the bureau had lured the kind of people who wouldn’t mind all that much.

“It didn’t faze me at all, because I was an entrepreneur. It just brought me to the first day of my company, where we’re all on picnic tables in an attic,” said Pete Carroll, who became assistant director for mortgage markets. “It turned out to be the nerve center. Someone said, ‘Do you want to move?’ I said, ‘No, this is great! Everybody’s buzzing around, Elizabeth Warren’s popping her head in.’ I was like, 'this is awesome, this is the greatest thing ever.'”

The bureau’s leadership took steps to solidify that sense of togetherness and a tight-knit culture, with mixed success.

Despite Warren’s hope to centralize the staff in Washington, a few satellite supervision offices were created to keep travel expenses down. A “Culture Team” organized bonding events and brown-bag lunches; there was a softball team called the Overdrafts. New staff were assigned “peer mentors” to create bonds across offices. Every hire, from assistant director to secretary, went through three days of consultant-designed training called “Excellence through Collaboration and Communication.” It engendered its fair share of eye-rolling (and has since been shortened).

“I was certainly bemused by it,” said Peter Wilson, who came from a private law firm to work in the general counsel’s office and has since left. “Some people thought it was a waste of three days.”

Many of the culture efforts were driven by Sartaj Alag, the former head of Capital One in Canada who came on as an adviser to Warren, supplying her with advice from management philosophy books like “Good to Great” and “Level 5 Leadership" (he's now chief operating officer at the bureau). Early on, he organized a survey of the staff to come up with the CFPB’s official mission and vision. When the time came to finally forge an agreement, he figured that the leadership team might be too busy and offered to put it off.

“We went round the table,” recalled Alag. “And it really told me what a special place this was when the people working really hard, the line people, said, ‘No, this is crucial, let’s do this now.’”

The conflicts within

Like any startup, early days were occupied by adding people as quickly as possible.

The Bureau had three ways to do that. It could make outside hires, from the private sector or academia or nonprofits. It could also take people who applied to transfer from other government agencies, like the Federal Trade Commission.

Most of those type weren't hired, which created resentment, and sometimes even legal action: Three former bank examiners sued for age discrimination when their applications were rejected, noting Warren's published comments about wanting to bring in "new, young staff and train them to follow the law." The Bureau usually settled with such plaintiffs, rather than let cases get to federal court.

The third way to join the Bureau was to be absorbed by default. Dodd-Frank had consolidated all the consumer protection functions of other agencies within the Bureau, so some employees -- from the department of Housing and Urban Development, for example -- transferred automatically.

The first problem with that was one of talent. The agency’s hard-charging leadership found many of the staff inherited from government bureaucracies too slow and unimaginative to take on the bureau’s big tasks.

But the larger issues were cultural. Most of the rule-writing team came from the Federal Reserve’s relatively small, neglected Division of Consumer and Community Affairs. There they had been accustomed to an orderly environment, where small groups drew up separate rules and sent them to higher-ups for approval.

By contrast, the CFPB’s process was consensus-driven. Everything had to come before a Thursday morning policy committee and be vetted through working groups with staff from other divisions, on the theory that multiple perspectives improve the final outcome.

“Everybody was weighing in on everybody’s business, which I really think to this day bogs down the agency,” said one former Fed staffer who has since left the CFPB — and who, like several others, asked not to be quoted to retain a relationship with the bureau.

“There wasn’t even consensus about whether we were to achieve consensus,” another said. “The poor folks sent to participate in my working group — were they supposed to be arguing with me?”

Bureau officials unapologetically defend the process. “We very purposely weren’t going to do things exactly how they may have been done in the past,” said Deputy Director Steve Antonakes. “That made some folks uncomfortable.”

The two camps also clashed over substance: What was the purpose of regulation, anyway?

Many in the Fed contingent, as well as from the private sector, thought they should strive simply to make banks more transparent, so that consumers could make informed decisions. But the Warren devotees and those from consumer groups emphasized a “cop on the beat” approach, with high-profile enforcement actions that would send a message. They also wanted to discourage exotic financial products, like complicated mortgage repayment plans and credit card teaser rates.

Leonard Chanin, who came from the Fed to oversee rulemaking, chafed at the more-interventionist approach. In September 2012, while his team was scrambling to meet an intense set of deadlines, Chanin left for a partnership at the Morrison Foerster law firm, where he advises clients on dealing with the CFPB.

“I lost faith that the agency would become a truly independent entity and carefully balance consumer costs and access to credit with consumer protection,” Chanin said. He offered the example of payday loans. “I think the bureau sees consumers taking out payday loans and believes ‘there must be something wrong here, because consumers really wouldn’t choose these products.’ There is great risk in assuming you know what is best for the consumer.”

That kind of conflict came by design. One of bureau’s three major divisions, “Supervision, Enforcement, and Fair Lending,” is a mix of the litigious culture of the Federal Trade Commission, which relies on prosecuting wrongdoers, and the more observational approach of the Fed, which could always revoke a bank's charter if it found anything amiss. Another division, “Research, Markets, and Regulation,” blended academically minded behavioral economists with lawyers. A clash of philosophies was inevitable.

Deepak Gupta, who came to the bureau as a litigation counsel from the advocacy group Public Citizen, left for private practice after losing patience with the process. “Your typical mediocre government agency has been around for a while, knows how it does things, has certain bureaucratic traditions or pathologies that have set in,” he said. “The CFPB version is more like a faculty meeting, all jumping all over each other.”

The threat from outside

While Warren’s staff worked to build the institution from the inside, she focused on its public face. Opposition ran high among Republicans and some Democrats with ties to the financial industry, and Warren had the delicate task of ensuring that the bureau wouldn’t be undermined by lawmakers before it could get up and running.

Even as Warren inveighed against Wall Street “behemoths” and the mess they had made, she was reaching out to those very banks to assure them that she wouldn’t be unfair. “I value your help — and your friendship — more than you know,” Warren wrote Richard Davis, the head of U.S. Bancorp, in an e-mail first obtained by the Hill newspaper.

Community banks, though a tiny slice of U.S. lending, were key to Warren’s strategy. They could become strong allies, casting the bureau as a defender of the little guy, if she could win them over.

Camden Fine, head of the Independent Community Bankers of America, took some convincing. Warren paid him a three-hour visit after seeing him slam the bureau on CNBC’s “Squawk Box.”

“She did not come off as many had characterized her, as some sort of harebrained, way-out-there, wonky liberal,” Fine said. “I found her arguments to be based on pretty solid reasoning. ” Fine would still argue strenuously for exemptions to rules that would govern the big banks, but at least he wasn’t out slamming the agency to the rest of America.

Every couple of weeks, Warren’s team hit the road, putting on speeches, roundtables and meetings with community bankers in every state.

“It felt like we were engaging in retail politics a little bit,” said Leandra English, who coordinated those events. “Time after time, we would go into a room, especially with community bankers, and you could just feel instantly that they were very skeptical, nervous, not expecting us to be friendly. And by the time we walked out, the tone had completely changed.”

Two of Warren’s key hires reflected the fissures and differing philosophies in the agency.

As director of enforcement, she chose Rich Cordray. He had just lost a bid for reelection as the attorney general of Ohio, where he took Bank of America, JPMorgan Chase and Citigroup to court over mortgage servicing practices and losses to state pension funds. People who have worked with him say Cordray is driven by personal narratives and consumers’ struggles. He walks around the office in socks, goes home most weekends to his family in Columbus and refers to staff members as “folks” in all-hands e-mails.

“Any great organization, over time, comes to feel like a second family to those engaged in it,” he wrote in an e-mail to the staff in early 2012. “We are broadly dispersed across the country, as many families are in this day and age. But the more we know and understand about one another, the more closely knit we become.”

At the other end of the spectrum was Warren’s deputy, Raj Date, who worked at Capital One and Deutsche Bank before founding a think tank in 2009 to help shape the future of the bureau. His style was that of a polished consultant, much more process-oriented than Cordray and more wary of onerous regulations.

“Raj had an affinity for Wall Street conversations,” said Zixta Martinez, head of external affairs at the bureau. “It’s the language he spoke.”

 The staff tended to align as “Rich people” or “Raj people.” And it soon became clear that one of those men — not Warren — would be nominated to lead the agency she invented. Her role in the administration’s $25 billion mortgage settlement further rankled banks and their Republican allies, and it didn’t appear that she had the Senate votes to get confirmed. News reports speculated that Date, who had been serving as interim director, would get the nod.

But in July 2011, days before the bureau launched, Obama chose Cordray. An early supporter of Obama’s presidential campaign, he was also Warren’s favorite for the job, came as close to her temperament as anyone in the organization and would carry out her wishes almost identically. Even in losing, Warren had won.

A new front

It felt like a victory. But Cordray’s selection was only the beginning of another war.

Republicans, insisting that the bureau should be headed by a commission instead of a director, refused to hold a vote on the nomination. And without a director, according to statute, it was unable to fulfill a substantial chunk of its mission: regulating non-banks, including payday lenders, providers of private student loans, debt collectors and mortgage servicers.

After six months of this, Obama installed Cordray through a January recess appointment, which enraged opponents even further. In a flurry of public statements -- all collected by the bureau's executive staff -- Republicans accused Obama of “steamrolling the Constitution" in appointing an "unaccountable czar" to head the "extremely controversial" new agency.

The Supreme Court agreed to hear a lawsuit challenging the president’s authority to make recess appointments. (Although the case addressed Obama’s picks for the National Labor Relations Board, the decision would apply to Cordray as well.) And there were other court cases, including one community bank’s challenge to the bureau’s constitutionality in U.S. District Court.

An adverse ruling could have scuttled the bureau and all the decisions it had made up to that point. Meanwhile, companies filed comments on every rule the CFPB proposed, saying the bureau didn’t have the requisite authority. When the bureau sent civil investigative demands to some Indian tribes running payday loan operations, they refused to comply.

The unsettled situation weakened the CFPB in dealing with the entities it had just begun to regulate. “Someone will say, ‘You’re trying to investigate me. I’m just going to say I think you don’t have the authority to do this,’ ” Peter Wilson recalled.

It also made the enforcement side more cautious. After an initial rush of action from “slam-dunk” cases, the pace slowed, as CFPB leaders insisted that cases be airtight before they went out the door. (A bureau spokeswoman said productivity only appeared to decline because attorneys were compiling evidence for future cases.)

 The bureau’s corps of energetic young lawyers became frustrated. In part to keep them busy, they were sent along with supervision staff to bank examinations, which became the industry’s single biggest complaint about the bureau overreaching. To bankers, it was a heavy-handed show of force, a sense that they were constantly on trial. The practice, which drew the attention of the agency’s inspector general, has since been abandoned.

The continuing uncertainty influenced all kinds of policy work, where decisions had to go through a clearance process that amplified doubt.

"One word could cost us a week of progress," says Ethan Bernstein, a professor of leadership at Harvard who had joined the bureau for its startup years. “Important, productive initiatives could get delayed all too easily by someone, seemingly at any level, suggesting it might make sense to wait for a more certain environment. Which decisions were implemented immediately and which were put on hold was sometimes affected by the distortion of political influences—the same sort of distortion which played a role in the government’s failure to prevent the last financial crisis.”

The biggest cost, however, might simply have been an atmosphere of tentativeness.

“It felt at the time like we were bending over backward to make sure nobody ever hated us,” said Mark Egerman, who came in the first months to research credit card markets and left in fall 2012 to found a mobile payments company.

“Sometimes you couldn’t write down your thinking, because it could wind up in front of some hostile congressional committee,” Gupta added. “I would use the word paranoia, except paranoia implies that it’s not justified.”

But the agency couldn’t just work to assuage Republicans and the financial industry. The bureau’s leaders knew they couldn't disappoint their left flank either. Although consumer advocates hesitated to criticize the bureau publicly, their willingness to go to bat for its independence depended on how well it did its job.

"They would've been hurt as much by holding back as not," says Mike Calhoun, president of the Center for Responsible Lending, a key force in the CFPB's creation.

In the end, Senate Majority Leader Harry Reid threatened to get Cordray approved with the “nuclear option,” which would have eliminated the supermajority routinely required under Senate filibuster rules. The threat worked. The final vote in July was 66 in favor to 34 against -- the Bureau had won some friends. Its enemies, meanwhile, had less power to retaliate for any actions they might not like.

"We lost our leverage," said Sen. Richard Shelby (R-Ala.) after the vote.

Out of the foxhole

After two and a half years, the Consumer Financial Protection Bureau has found its footing.

Among its achievements: a consumer complaint process that has already made banks more responsive. A data-based method for assessing which institutions deserve the most scrutiny, rather than inspecting them all at arbitrary intervals. A renewed onslaught of enforcement actions. And a record of hitting each rulemaking deadline set by Dodd-Frank as it fundamentally reshaped the mortgage market, while other agencies let theirs slide.

In the process, however, it has had to become a fairly normal government agency — one that risks drifting into the same kind of complacence that dogged its predecessors. Cordray obliquely acknowledged this in an address to the staff after his confirmation. “I worry that this agency is a well-paid banking regulator,” he said. “And I want to make sure we stay in touch with the people who need us most to do our work.”

By early 2013, the bureau faced a brain drain, as it lost many of the hyper-creative people who helped set it up -- as well as some of the early trophy hires, like Len Kennedy and Catherine West. Some were bad fits; some couldn’t keep up with the exhausting pace. "We busted our asses to hire these amazing people, only to watch them burn out," Egerman says.

Many, though, were just tired of dealing with a calcified government superstructure that governed many aspects of how it had to do business. The staff narrowly voted to join the National Treasury Employees Union in 2013, adding another layer of internal conflict.

In retrospect, the long months of embattlement may have served as a binding agent.

“Ironically, the constant attack from the outside created a real solidarity. Nothing creates cohesion like being stuck in a foxhole with one another,” said Date, who left at the beginning of 2013 with several high-level staffers to found his own boutique financial services firm.

The staff of the CFPB isn’t in a foxhole anymore. And that transition — from uncertain start-up to fully built federal agency — has brought a new culture.

“You’re left with the people who like the salary of a federal regulator and who are willing to put up with the bulls--- of a federal agency,” said one such staffer. “It kind of ambles along, attracting decent people. But I don’t think anyone has the dreams and idealism that we saw.”

A slightly condensed version of this story appears in the Sunday Business print edition.