The Consumer Financial Services Blog

Is he or isn’t he the director of the Consumer Financial Protection Bureau?

Richard Cordray is being barred from testifying before the House Financial Services Committee in the coming weeks until he is confirmed by the Senate because a federal appeals court ruling has put into question the validity of his appointment.

In January, a federal appeals court ruling held that President Obama’s recess appointments to the National Labor Relations Board were unconstitutional and invalid.

And since President Obama gave Cordray a recess appointment in January 2012 to circumvent Senate opposition to the appointment, Committee Chairman Rep. Jeb Hensarling (R-Tex.) is questioning the constitutionality of Cordray’s appointment.

Senate Republicans have refused to confirm Cordray’s appointment until Congress passes a law that would make the agency accountable to a bipartisan commission and to the Congressional appropriations process.

Unlike other regulatory agencies such as the Securities and Exchange Commission, the CFPB has complete autonomy. Instead of being subject to annual appropriations by Congress, it draws a check from the Federal Reserve Board, which is barred from interfering in its activities, and has no board oversight.

More on the subject is available at the House Financial Services Committee’s blog:

http://financialservices.house.gov/blog/?postid=330862

Earlier this month, Reuters reported that several state attorneys general are engaged in a coordinated investigation of the defaulted debt sales practices by some of the nation’s largest banks. Last fall, the American Banker reported that Mississippi Attorney General Jim Hood was looking at JPMorgan Chase’s debt sales practices. The Federal Trade Commission released its study last month entitled The Structure and Practices of the Debt Buying Industry. And then there are  remarks recently delivered by Richard Cordray, Director of the Consumer Financial Protection Bureau (“Bureau”), at the first meeting of its Consumer Advisory Board:

[A] creditor may decide to sell [a defaulted debt] to or contract with a debt collector to secure payment of what is still owed. Once this occurs, the paying business relationship has shifted; it now lies between the debt collector and the creditor, not the consumer and the creditor. ¹ This can lead to mistreatment of the consumer, who becomes, in effect, a kind of “bystander” to the new business relationship. In this situation, creditors may have little reason to ensure that debt collectors treat consumers fairly and appropriately or that they maintain and use accurate information.

The state investigations, release of the FTC study and Director Cordray’s remarks may not be a coordinated effort, but they demonstrate that regulators are taking a hard look at debt sales. A fundamental change in the relationship between seller, purchaser and consumer might be near.

Let’s read the tea leaves dropped by Director Cordray in his remarks. Consumers choose their creditors, but if the consumer’s creditor sells the debt, the consumer has no choice in deciding the entity with whom she is now in a creditor-debtor relationship. The purchaser of the debt, according to the Director, may have no desire to treat the debtor ² “fairly and appropriately.”

The result, the Director says, is a “dysfunctional dynamic,” in which the debtor is a “kind of ‘bystander’ to the new business relationship.” He added, “Without consumer choice, a key element of market discipline is lacking. The result is to permit or even facilitate a distinct indifference to the interests of individual consumers.”

The remarks suggest that consumers should be able to choose who collects their defaulted debt, or that creditors who sell defaulted debt should be accountable for the debt collection conduct of their purchasers. While either option is absurd, I do not believe they are simply theoretical musings. The Director went on to say:

At the Bureau, we are taking on this problem by highlighting troublesome practices and working to fix them. At the same time, we recognize that careful rules and effective oversight (through supervision and enforcement) are needed if we are going to correct the kinds of market failures that subordinate the interests of individual consumers. We are strongly committed to shouldering our important responsibility to protect consumers in these particular markets.

Will the Bureau “fix” defaulted debt sales? Will debtors be able to “veto” who collects their delinquent obligations? I doubt it. Will creditors who sell defaulted debt be accountable for the conduct of their purchasers? That could be where the Bureau is headed. The Bureau issued a bulletin last year advising its regulated entities they will be accountable for the acts of their “service providers,” that is, persons who provide a “material service . . . in connection with the offering or provision . . . of a consumer financial product or service.” ³ In many instances, this bulletin subverts traditional common-law theories of liability. But, so would holding a seller liable for the conduct of its purchaser. The “fix” may be coupled with regulations governing the sale of delinquent consumer debt.

The observations made by the Director, in my opinion, are equally applicable to the sale of  performing debt. Either way, such a rule would have immediate and long-term impacts. It would stop debt sales in the short-term, curtail them in the long-term and reduce the participants in that marketplace.