Richard Cordray
President Barack Obama's decision to install Richard Cordray as the Consumer Financial Protection Bureau director reopened an unsettled legal debate over recess appointments. REUTERS/Kevin Lamarque

The Consumer Financial Protection Bureau (CFPB) will wield broader powers to crack down on formerly unregulated sectors of the economy that include payday lenders and mortgage brokers after President Barack Obama installed Richard Cordray as head of the nascent agency.

By elevating Cordray with a recess appointment that does not require a Senate confirmation, Obama bypassed vehement Republican opposition that had left the consumer watchdog without a director months after its July launch. While the agency had been able to issue rules under existing laws and examine practices ar some of the largest banks, it will now be able to police financial players who advocates say have histories of abusive and predatory practices.

So far, the bureau has been able to pursue greater transparency under consumer protection laws such as the Truth in Lending Act, the Fair Debt Collection Act and the more recent Credit CARD Act. That included developing uniform disclosure forms that would define the terms of a new credit card or a mortgage in simple language, something mandated by the Dodd-Frank law.

CFPB's Rule Making Extends to Non-Bank Lending

But now the agency's supervisory and rule-making powers will extend across the entire financial ecosystem to encompass non-bank lending. That includes mortgage brokers and lenders who are not affiliated with a big bank. Such non-bank lenders played an outsize role in issuing the subprime mortgages that led to the collapse of the housing sector.

What you don't want in the financial markets is to have some players who are allowed to do predatory bad things out of reach of overseers when you're telling other players they can't do certain things, because then there's pressure for everyone to do those things and that produces a race to the bottom, said Kathleen Day, a professor at Georgetown University and a spokesperson for the Center for Responsible Lending.

The bureau will also have authority to supervise payday lenders, entities that offer short-term loans that often carry exorbitant interest rates or lock consumers into cycles of continuing to borrow money to cover the costs of taking out an initial loan. According to a report by the Center for Responsible Lending, ensaring repeat customers is central to the payday lending business model, accounting for about three quarters of its total loan volume.

Why would you want to legalize loan sharking, which is essentially what most payday lending is? Day said. There need to be some curbs on it so it can't be there just to abuse and trap people in debt.

Cordray's appointment will also extend the agency's authority to credit-rating agencies who are responsible for issuing an often confusing array of different credit scores. A report issued by the Consumer Financial Protection Bureau shortly after it began doing business noted that inconsistencies in credit scores means consumers cannot know exactly how a creditor will view them.

The agency had also been tasked with unfair, deceptive, or abusive acts and practices, but prior to Cordray's appointment it was unclear what authority the bureau had to respond to consumer complaints or move beyond an investigation. Havinf a director at the helm will clarify the bureau's powers.

One of the places where there was some question about their authority was enforcing unfair and deceptive practice laws,said Ira Rheingold, Executive Director of the National Association of Consumer Advocates. Now there's no question they can bring enforcement under an [Unfair and Deceptive Acts or Practices] statute.

Republicans have strenuously objected to the new agency, contending that it too much unchecked authority and seeking to change its leadership structure from a single director with a five-member board. More than anything, Rheingold said, Cordray's appointment will be important to help reduce uncertainty about what the agency can and cannot due in the face of a political stalemate.

You're talking about an agency that's under enormous pressure, the fact that they now have an actual director who can set direction is a very important thing for the agency holistically, Rheingold said. I think it's just very important to have someone on top to lead them and to not worry about what authority they have and what they don't have.