How Elizabeth Warren Can Save the CFPB

WASHINGTON — Sen. Elizabeth Warren, the architect of the Consumer Financial Protection Bureau, is in a unique position to help rescue the agency from a legal morass that threatens to undo much of its work.

An appeals court ruling issued last week undermined the legality of President Obama's recess appointment of Richard Cordray as the agency's director, raising the prospect that some of the rules it has issued in the past year could be invalidated.

The uncertainty has fueled talk that Democrats might seek to cut a political deal with Republicans, many of whom seek to scale back the agency, in order to secure the confirmation of Cordray and assure the CFPB's legal powers.

As one of the Senate Banking Committee's newest members, Warren could prove to be a key player in those discussions, observers say. Unlike more moderate Democrats, Warren has relative freedom to cut a deal as she is unlikely to be accused by pro-consumer groups of selling out the agency she created.

"She has the ability to play that role because she's essentially insulated from criticism on this," said Mark Calabria, a former top Republican Senate aide and now director of financial regulation studies at the Cato Institute. "She can do what she wants on CFPB and the left can't criticize her. It's a 'only Nixon can go to China' kind of thing."

Brian Gardner, a policy analyst at KBW, agreed.

"If she wants to get behind some kind of compromise… I don't know where the opposition comes from at that point," said Gardner.

Republicans are demanding three changes to the CFPB — replacing its single director with a five-member commission, handing control of its budget to congressional appropriators and giving bank regulators more say in overriding its decisions.

Warren is likely to agree to only one of those changes, observers said: replacing the director with a five-member commission. After all, her original vision for a consumer protection agency was even called the Financial Product Safety Commission and modeled after the Consumer Product Safety Commission, which is run by three board members.

"It's not like you're asking her to a retreat on positions she hasn't already held," Calabria said.

Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., agreed that a compromise on the director versus a commission might make sense.

"It's a legitimate discussion point," she said. "There are pro-consumer arguments in favor of a commission structure. If there were to be a compromise, that's likely the common ground."

Of the three other banking regulators, both the FDIC and Federal Reserve are controlled by boards. The Office of the Comptroller of the Currency has a single director, but answers in a limited way to the Treasury Department, where it is technically housed. Some policymakers prefer the board structure because it gives the minority party more of a voice in the composition of the board and the agency's decisions.

But the other Republican demands are likely to be a bridge too far, both for Warren and the White House. That is particularly true for putting the CFPB on the appropriations process — a move that would make it the only banking regulator to be funded directly by Congress and would allow lawmakers significant interference in the agency's operations.

Observers pointed to the Securities and Exchange Commission and Commodity Futures Trading Commission, both of which are on the appropriations process and have seen their budgets gutted in an attempt to stop them from implementing the Dodd-Frank Act.

"When the appropriations process becomes a tool for lobbyists to use to thwart rulemakings or other agency actions — as opposed to a process for assuring adequate funding for the agencies to discharge the responsibilities Congress has given them — it impedes regulatory effectiveness," Bair said. "To function well, agencies --just like businesses — needed certainty around budget planning and the ability to commit to multi-year projects, particularly IT… I think the consumer advocates would be right to fight to the max on the funding question."

Warren has yet to signal any attempt to spearhead a deal.

A spokesman said she now supports the idea of a single director rather than a commission.

Warren believes that the "single director structure makes sense and that the CFPB should continue to be able to operate, like every other banking regulator, without relying on appropriations for its funding," he said.

Yet it's difficult to see how she can stay out of the fray, especially when the creation of the CFPB is the very thing that put her in the spotlight.

Lacking a political deal, the CFPB could be in legal limbo for months or years, potentially crippling key parts of the agency's supervisory powers. The appeals court ruled last week that President Obama's recess appointments to the National Labor Relations Board were unconstitutional. Although the suit did not address Cordray, he was appointed at the same time under the same legal authority, making it likely the appeals court would rule the same way if it were challenged in court.

It is unclear how a loss of Cordray would affect the rules that the CFPB has already promulgated. A court could rule they were valid because they were undertaken in good faith, or say they apply only to banks rather than nonbanks. Due to a drafting error in Dodd-Frank, the CFPB only has the power to supervise nonbanks if it has a Senate-confirmed director. There is no similar requirement for bank oversight.

That raises the potential that without Cordray's formal confirmation by the Senate, a substantial chunk of the CFPB's work could be thrown out. Several Republican senators, meanwhile, have even introduced legislation that would prohibit the bureau from spending funds on any actions that require the approval of a director until one is confirmed.

Facing that prospect, it seems unlikely Warren, of all people, would want to stay on the sidelines.

To be sure, some Democrats appear convinced that the court ruling actually helps them, pointing to the uncertainty it creates in the mortgage market and the harm it does to banks, which will continue to be regulated by the CFPB while nonbanks may not be. According to this theory, banks will put pressure on Republicans to drop their objections to Cordray's confirmation.

Yet this theory seems to overplay banks' influence in Congress, which is more limited than critics like to claim, as well as underplay GOP lawmakers' willingness to hold out for some kind of deal.

There are, of course, several obstacles to a Warren-crafted deal. For one, it's unclear Republicans would simply accept a commission structure, without a change to the agency's funding.

"I don't think Republicans are going to go along with just a commission — they want the issue of budget authority as well," said Gardner.

Some former Hill staffers also cautioned against Warren getting involved. Most freshmen senators generally try and keep a low profile in their first years in the Senate. Moreover, Republicans could be resistant to giving her a political victory, even if it also gave the GOP something it has long sought.

"I don't see the Senate being spurred into action by Elizabeth Warren," said one former Hill aide. "I bet half of the Republican caucus would say if she's for it, they'd be against it."

Yet one thing appears certain. The CFPB, already a big part of Warren's history, is likely to be a substantial part of her future in the Senate.