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The Internal Divide Behind Trump’s Takeover of Consumer Watchdog
December 21, 2017
WASHINGTON—The Trump administration’s move to put its budget chief in charge of the Consumer Financial Protection Bureau exposed a divide between a White House faction and the Treasury Department over just what the role of the consumer watchdog should be.
The installation of Mick Mulvaney, head of the Office of Management and Budget, as the CFPB’s interim director was a win for conservatives who favor dismantling much of the regulator, which was created by President Barack Obama and congressional Democrats in the wake of the financial crisis to help consumers harmed by problems involving mortgages and other consumer-finance products.
Republican critics say the CFPB has increased compliance costs and reduced credit availability for those it was created to protect.
Many in the dismantling camp, including Mr. Mulvaney, a former congressman, have spent years trying to block the CFPB’s agenda under Richard Cordray, an Obama appointee who stepped down after Thanksgiving. Mr. Mulvaney in the past has described the CFPB as “one of the most offensive concepts in government.”
Mr. Mulvaney declined to comment for this article.
His appointment, until a permanent successor can be found, was a setback for some financial companies. While they hoped for a less-aggressive regulator than Mr. Cordray, companies in certain industries still wanted the watchdog to have some regulatory teeth, according to people familiar with the matter.
Companies have invested billions of dollars in complying with the agency’s rules since it began operating six years ago. What’s more, many in the mortgage and financial-technology industries see some rules as necessary to help ensure a stable market for securities such as those formed when mortgages are packaged and sold off.
They saw an ally in Treasury Secretary Steven Mnuchin, a former mortgage banker, who interviewed several candidates to run the CFPB, including candidates recommended by the financial industry.
The White House, however, was conducting its own search. While the administration consulted with the Treasury Department, White House officials controlled hiring decisions and weren’t aware of the extent of the Treasury’s search efforts. “All appointments go through the White House,” one White House official said.
Agency Launched Many Initiatives
Under Republican leadership, Consumer Financial Protection Bureau rules and initiatives could be repealed, pushed back or re-evaluated. Here are some of the most significant actions by the CFPB since it began operating in 2011.
- In October, the CFPB issued a payday-lending rule requiring lenders to determine whether a borrower could afford to repay a loan before extending credit.
- Early in its history, the agency created a public database of consumer complaints and company responses related to financial products.
- The CFPB has gone after dozens of debt collectors over alleged fraud and deceptive practices, and has proposed new rules to regulate the industry.
- The agency has implemented a number of new disclosure requirements for mortgage lenders, including changes to the Home Mortgage Disclosure Act that take effect in January.
- The CFPB has also required mortgage lenders to make sure borrowers have the ability to repay the loans. As a result, lenders began to make most of their loans as “qualified mortgages” meeting certain criteria.
A person close to Mr. Mnuchin said he understood the White House was leading the process and supported its move to appoint Mr. Mulvaney.
Backing the White House’s move were Republicans associated with Vice President Mike Pence, including his economic adviser Mark Calabria, a former financial-regulation expert at the libertarian Cato Institute, people familiar with the matter said. Also on board was Rep. Jeb Hensarling (R., Texas), who has spearheaded Congress’s attack on the CFPB.
Mr. Mnuchin’s camp, including Craig Phillips, a top Treasury adviser and former BlackRock Inc. executive who spent decades selling mortgage-backed securities, was seeking a candidate who would take an incremental approach to reducing regulatory burdens, people familiar with the matter said.
“We have never said get rid of the CFPB,” said Richard Hunt, president of the Consumer Bankers Association, a banking trade group. “We need consumer protection, and banks have already invested billions to comply with CFPB rules.”
The search for a permanent director to succeed Mr. Cordray started in early 2017.
Early in the process, Mr. Mnuchin’s top choice was Brian Brooks, a former vice chairman of OneWest Bank, the lender Mr. Mnuchin bought and turned around after the financial crisis, said people familiar with the matter. Some consumer advocates also backed Mr. Brooks, now general counsel of Fannie Mae. Mr. Brooks declined to comment.
Some in the mortgage industry were concerned the Trump administration might pick someone who would undo post-crisis rules that guide the mortgage lending and securitization businesses.
“The mortgage industry in particular relies on detailed regulations and guidance,” said Ben Olson, a Buckley Sandler lawyer. “In many cases, the industry wants more and better guidance from the CFPB, not less.”
Mortgage officials were wary of the influence of Mr. Calabria, Mr. Pence’s adviser, who last year called mortgage securitization “a false god that failed us.”
Mr. Calabria didn’t respond to requests for comment.
A group of mortgage-industry allies led by Lewis Ranieri, a New York financier who helped invent mortgage-backed securities, and Michael Calhoun, who leads the Center for Responsible Lending, a liberal consumer group, tried to persuade Mr. Mnuchin to get behind its pick, Eric Kaplan, director of housing finance at the Milken Institute, a centrist Washington think tank, said people familiar with the matter. Mr. Mnuchin turned the group down.
Mr. Mnuchin also considered Keith Noreika, who until November was acting Comptroller of the Currency, and Jeremiah Buckley and Andrew Sandler, both from the law firm Buckley Sandler.
Some conservatives separately pushed for candidates calling for fundamental changes at the CFPB, such as Todd Zywicki, a George Mason University law professor, or Rep. Randy Neugebauer (R., Texas), another congressional critic of the bureau.
The competing constituencies slowed the process of finding a permanent successor, said one person who meets regularly with officials at Treasury and the White House’s National Economic Council. Another person familiar with the search said the White House now has a list of finalists and is in the process of picking a nominee.
“Treasury is working with the White House to secure a permanent director who will bring much-needed accountability, transparency and balance to the CFPB,” a Treasury spokeswoman said.
Crosscurrents over who to select stemmed in part from long-brewing mistrust between Treasury and some White House officials, including at the NEC, said people familiar with the matter. Mr. Calabria has voiced skepticism about policy and personnel leanings of Treasury officials, the people said, viewing them as insufficiently conservative.
“There’s a disconnect between NEC and Treasury on a whole variety of things,” said one person familiar with the administration’s internal dynamics.
In mid-November, Mr. Trump asked Mr. Mulvaney to run the CFPB temporarily, surprising business interests, Democrats and consumer groups supportive of the bureau. Mr. Cordray fought back, attempting to install his own interim director—his former chief-of-staff Leandra English. She sued to stop Mr. Mulvaney from taking over, but a federal court ruled in favor of the administration in litigation that is still moving through the courts.
Mr. Mulvaney so far has issued short-term freezes on new regulations and hiring, and ordered a review of more than 100 ongoing enforcement cases. As a congressman, he was broadly critical of CFPB’s agenda, opposing its approach to regulating mortgages, payday lending and other financial products. One White House official said Mr. Trump picked Mr. Mulvaney in part because he was familiar with CFPB issues and is trusted within the White House.
“The West Wing views Mulvaney as someone who is up for a fight like this,” said a person close to the administration.
In recent months, the rift between Treasury and some in the White House over regulatory policy has deepened, people familiar with the matter said. Those favoring smaller government are frustrated with Mr. Mnuchin’s financial deregulation proposals, these people said.
The Treasury Department since June 2017 has released a series of reports offering a blueprint for the overhaul of financial rules—following a February presidential order for a review of all financial regulations—drawing praise from the financial industry and complaints from conservatives.
“It’s been much more conciliatory and much more biased toward maintaining the status quo. That’s been something of disappointment,” said Thaya Brook Knight, associate director of financial regulation studies at Cato.
—Lalita Clozel, Eli Stokols and Nick Timiraos contributed to this article.