July/August 2012 Too Important to Fail

Predatory lending still poses a systemic risk to the economy. Will Obama's new Consumer Financial Protection Bureau succeed in taming it, or will the agency be strangled in its crib?

By John Gravois

“There were deadbeats,” he grants. But a huge number of delinquent Ohioans were ordinary middle-class folk who had simply hit road bumps—medical problems, divorce, a death in the family, job loss—but had no shock absorbers, no savings, to help them bounce back. And so they had stopped paying their mortgages and, with them, their property tax bills. Cordray’s office also began to detect that a larger story was playing out: Ohio, it turned out, had been one of the first hotspots of subprime lending, and, by the mid-2000s, evidence of rampant speculation and mass delinquency was surfacing fast. “We began to see the irregularities that eventually became known as the foreclosure crisis,” Cordray recalls.

While essentially serving as a popularly elected collection agent, Cordray increasingly pivoted toward another mission: trying desperately to keep Ohioans in their homes. In 2006, Cordray was elected state treasurer, and continued in much the same vein. The problem was that other entities to whom homeowners owed money—the mortgage servicing companies that were in charge of managing people’s loans, for instance—were far less interested in problem solving and working with Ohioans than he was. In fact, they were ruthless. And so, in a 2008 special election, Cordray ran for the office of state attorney general. His platform this time: holding Wall Street accountable.

A lanky former basketball player with sandy blond hair, Cordray exudes a slow-moving midwestern gentleness—he wears Gold Toe socks around the office—combined with a cool cerebral intensity; he comes off like an odd cross between Mr. Rogers and Eliot Ness. In the aftermath of the financial crisis, he aggressively won billions in settlements for Ohio from firms like Merrill Lynch and AIG, epitomizing a class of state attorneys general who fought to bring Wall Street to justice at a time when the federal government was doing little more than trying to stabilize it. “We see what Washington doesn’t: the houses lying vacant, the eyesore stripped for copper piping with mattresses out back,” he told the New York Times during his tenure as Ohio’s top lawman in 2010. “We bailed out irresponsible banks, but we forgot about everyone else.”

Still, because of a legal regime called regulatory preemption—a rule that allowed federal regulators to keep state attorneys general from taking action against federally chartered financial institutions—Cordray was constantly frustrated by what he couldn’t do. “I could not sue any nationally chartered bank,” he recalls. “We were kind of picking around the edges of the problem.” In 2010, Cordray lost his seat to the popular ex-senator Mike DeWine. A mere three days later he got a phone call from Elizabeth Warren, who was putting together the founding team of the Consumer Financial Protection Bureau, wanting to know whether he might be interested in coming to Washington.

When Obama finally appointed Cordray to lead the bureau this past January, it had the effect of legally imbuing the bureau with all of its powers, and all of its responsibilities, under the law. For Cordray, the event entailed sitting quietly on a stool next to the president in a crowded gym for a few minutes and then spending the next several months in a dead sprint. “It was like being shot out on a rocket,” recalls Peggy Twohig, the bureau’s head of nonbank supervision (a role, by the way, that has never existed in the history of U.S. government or finance).

The many deadlines that the bureau is required to meet under Dodd-Frank have held its staff to a grinding pace. Thus far, the CFPB has issued proposed rules for mortgage servicers, proposed to bring large debt collectors and credit reporting agencies under federal supervision for the first time ever, and launched an inquiry into overdraft fees, among many other things. In terms of sheer man-hours, it has spent the largest share of its time writing extensive new rules for the mortgage sector—the largest consumer finance market in the world.

Along the way, the bureau has done what any go-getter does while new on the job: try to make itself seem indispensable. Whenever possible, the bureau has made its announcements, kickoffs, and speeches in places other than Washington. On the day I met him, Cordray had just returned from Nashville and was on his way to Indianapolis, luggage in hand. In late January, barely two weeks into the job, he had flown to Birmingham, Alabama, to hold a field hearing about payday loans. The event was scheduled to take place in a small room in the city’s civil rights museum, but as the RSVPs piled up, it had to be moved—first to a different room, and then a few blocks away to a space in the Birmingham convention center. Even there, fire marshals eventually had to turn people away at the door.

If there is a rule—as it sometimes seems there must be— that the noble purpose of a D.C. institution is proportional to the drabness of its offices, then the early incarnations of the CFPB were awfully noble. For the first stretch of its existence, the bureau was housed in a few floors of rented space in a reddish granite-faced building near Farragut North. The interior was a scene of scuffed carpet, boxes lying about, fluorescent light, and d├ęcor the palette of seasickness: greenish pale gray and bruised purple.

Into this vessel, an unusually young, bright-eyed, and idealistic corps of civil servants crammed itself steadily over the course of 2011. The staff grew from a handful to hundreds in a matter of months. Bullpens sprang up in any room much larger than a closet; at one point, there were senior economists working at card tables in the bureau’s heavily cannibalized main conference room.

In part because of its wonky but swashbuckling mission, and in part because of its association with Elizabeth Warren, the bureau has attracted an unusual mix of talent for the civil service. “I’m not someone who ever thought I would work for the government,” says Audrey Chen, a New York information designer whose previous employers included several tech start-ups and Comedy Central. The bureau’s part-time assistant director of research is Sendhil Mullainathan, a MacArthur “genius” grant recipient, Harvard professor, and star of the emerging field of behavioral economics. And numerous other recruits came from high-powered consulting firms or data-intensive advocacy groups like the Sunlight Foundation or Pew, giving the bureau a high-nerdy, service-minded feel: like a McKinsey and Company for the 99 percent.

One of the chief custodians of this heady culture is a man named Rajeev V. Date (pronounced Da-tay), one of the bureau’s first hires and now Cordray’s deputy. He has played an outsized role in recruiting staff and setting the bureau’s high-minded tone—which is interesting, given that Date’s background is not primarily in academia or advocacy, but in the financial industry. A boyish-looking lawyer trained in applied mathematics, Date is a former vice president at Capital One Financial, the wildly profitable Virginia credit card company that pioneered the use of “big data”—that is, analyzing mountains of transaction records to predict and then goose profitable consumer behavior—in financial marketing.

John Gravois is an editor of the Washington Monthly.


  • paul on July 09, 2012 1:30 PM:

    The other week I was reading some century-old novel from Gutenberg, in which the hero, a munitions manufacturer (!) decides that he's not going to gouge the government for a huge set of emergency war orders. Instead, he's going to take "only a banker's profit."

    That's what commodity businesses where customers know exactly what they're buying ultimately come down to: small, consistent profits. Exactly the opposite of the financial industry today.

  • kay sieverding on July 14, 2012 11:29 AM:

    I don't understand why no one is talking about modifying the 1948 McCarran Ferguson Act. It prohibits federal regulation of insurance.

    Even if the McCarran Ferguson is allowed to stand, the feds should step in when the states fail to regulate insurance.

    Look at this insurance company. It claims to be a Bermuda company and claims to sell insurance across the U.S. It's not listed on the website of the National Association of Insurance Commissioners


    Look at Colorado Intergovernmental Risksharing Agency. Here's a blog I wrote about CIRSA


    Now the State of Colorado links to the NAIC. Previously they listed TIG as active and selling health insurance. The phone number listed was a residential cell phone and the address listed was a private home.

    There are other examples. If you look at state insurance websites you will see that they list out of state insurers. But the states where they are listed as being based in won't have records of them. Often the names are changed slightly too indicating that legally they aren't the same company.

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