When it opens its doors next week, the federal government's new agency to protect consumers from financial fraud won't be quite the aggressive watchdog promised a year ago.
Because of political squabbling, the Consumer Financial Protection Bureau formally will launch without an appointed director. And the lack of leadership has real consequences.
The agency won't have power, for instance, to crack down on mortgage brokers, some of which helped lead the nation into the housing debacle four years ago. It also won't have authority over other largely unregulated sectors of the financial services industry, such as payday lenders and remittance companies such as Western Union, that it was created to police.
"It's very disappointing that the centerpiece of the president's financial reform agenda is not ready to hit the ground running," said Travis Plunkett, legislative director for the Consumer Federation of America.
Vehement opposition to the agency from Republicans and much of the financial services industry has stalled efforts by the Obama administration to install a director, a five-year appointment that must be confirmed by the Senate.
With the agency formally opening for business Thursday, there is not enough time to put a director in place. And without an appointed director, the agency legally cannot exercise expanded consumer protection powers that Congress granted it in last year's financial regulatory overhaul to try to prevent another crisis, government officials said.
Besides being unable to use its authority to regulate mortgage brokers and other financial firms outside the conventional banking industry, the agency would be denied, at least initially, broad authority to prohibit "unfair, deceptive or abuse acts or practices" or to issue rules requiring better disclosures of the terms of financial products, the inspectors general of the Treasury Department and Federal Reserve determined.
The consumer bureau still will be able to function under its de facto acting director — White House and Treasury advisor Elizabeth Warren, who has been working since last year to hire staff and organize the sprawling agency.
And it will have plenty of other powers to exercise. The agency immediately will take over from banking regulators the authority to enforce 18 consumer protection laws that existed before last year's financial overhaul. Those include rules governing credit cards and oversight of mortgage servicers.
Some banks aren't happy that they will face oversight by the consumer agency beginning next week while competitors, such as payday lenders, initially won't.
"One of the purposes of the CFPB was to have a level playing field and that certainly will not be accomplished," said Richard Hunt, president of the Consumer Bankers Assn. Visiting a bank in Tupelo, Miss., this week, Hunt said he counted 14 payday lenders in a 1-mile stretch.
Rep. Barney Frank (D-Mass.), one of the architects of the financial regulatory overhaul, said the agency's situation wasn't a major problem — yet.
"A month without raising the debt limit would be a disaster," he said. "A month of not adopting new rules for check cashing — not a disaster."
But Frank said that if the agency remains without an appointed head for "many more months" that he would be "very disappointed."
Warren acknowledged the limited initial authority, telling lawmakers this week that when the consumer agency has its director and fully operational powers, it will be "a very good day."
Some Republican lawmakers, who opposed the creation of the agency, said it should not get any power until it has a Senate-confirmed director.
"I think everybody's still very much in a wait-and-see mode, and we're running up against a deadline without somebody to give the direction that's needed," said Rep. Shelley Moore Capito (R-W.Va.), who introduced legislation blocking the transfer of all powers to the agency until it has a director.
Capito and nearly every other Republican in Congress opposed the creation of the Consumer Financial Protection Bureau, arguing it would restrict access to credit by average Americans. Banks opposed the new agency as well, saying it made no sense to remove consumer protection from the oversight of banking regulators who could balance it with the health of those financial firms.
Warren, a Harvard law professor who specializes in consumer bankruptcy, argued that those regulators made consumer protection a low priority. In 2007, she proposed creating an agency to protect consumers from bad loans and other financial products.
The idea quickly was embraced by consumer advocates and the Obama administration, who made it the focal point of the most sweeping rewrite of financial regulations since the Great Depression. They charged that existing federal regulators put bank profits ahead of consumer protection in the years leading up to the subprime market meltdown.
Warren appeared the obvious choice for the agency's powerful director. But strong Republican opposition made the White House nervous that the nomination would be filibustered in the Senate, preventing Warren from playing any role in organizing the agency.
So in September, Obama appointed Warren to dual White House and Treasury advisor positions that did not require Senate confirmation. Under the law, Treasury Secretary Timothy F. Geithner is responsible for launching the agency and would exercise its authority until a director was confirmed.
Geithner delegated the job to Warren, who has been hiring staff, meeting with bankers and consumer groups and readying the agency for operations. In May, nearly all Republican Senators vowed to block any nominee for the job unless the administration made major changes to the agency's structure, including replacing the director with a five-member bipartisan commission.
White House spokeswoman Amy Brundage said Obama "will continue to oppose any efforts like these that weaken the agency and hurt American consumers." She said the president is considering "a number of candidates" but has made no decision.
Obama could overcome the Republican threats by making a so-called recess appointment when the Senate goes on break next month, temporarily installing a director until the end of 2012 without a confirmation vote.
But that would be a highly controversial move that would rob the new director of a five-year term. And Republicans could use procedural tactics to prevent such an appointment by keeping the Senate from technically going into recess.
Plunkett said the consumer bureau could run for a short time without an appointed director, but that will slow the agency from addressing longstanding holes in consumer protection.
"Not having a director merely pushes the agency back further," he said. "It's like holding the runner at the beginning of a race. It's going to make it harder for the runner to catch up."