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PHH Corp. court challenge could revive calls for CFPB reform, attorney says

The lender PHH Corp. argued last month before the District of Columbia Circuit Court of Appeals that the Consumer Financial Protection Bureau (CFPB) as structured under a single, powerful director, Richard Cordray, was unconstitutional. Craig Nazzaro, a former vice president with JPMorgan Chase & Co. and currently of counsel in the Atlanta office of Baker Donelson, spoke with Scotsman Guide News about why that case may bolster efforts to reform the bureau. Nazzaro recently penned an article, appearing in the American Banker and other trade publications, making a case for restructuring the CFPB.

Why do say that the CFPB as structured under a single director is flawed?

Craig NazzaroThe way it is currently organized pours way too much power into the director, especially since the director can just request funding from the Fed and has no Congressional oversight or by any other means. It just empowers one person to set the tone and the direction of the CFPB totally under his own beliefs.

Why would the agency work better under a commission?

First, it would provide for some balance. The most likely commission structure would be with five members. You would have five different sets of opinions, life experiences, coming from different backgrounds to oversee the operations and the enforcement of the CFPB, so you wouldn’t have the one tone that is given from a single director. For example, with Director Cordray [the former Ohio attorney general], you have a person who came from basically an all-government background that was heavy on enforcement experience. So it is no surprise that you see the CFPB being accused of regulation through enforcement or heavy-handed enforcement.

He also has little operational experience when it comes to consumer-lending institutions. You often see criticism that the CFPB doesn’t fully understand the effects of a new regulation or an enforcement action. I think he [Cordray] would be a great member to a commission panel because you would have the enforcement section, but we need some people with operational experience or just different mindsets as a whole to bring a more well-rounded approach to the CFPB’s actions.

How do you respond to people who say that a commission would water down the CFPB and nothing will get done to protect consumers?

In regulation, you need consistency. In my opinion, a commission would provide that consistency. You wouldn’t have a commission as partisan as a single-director structure could be. You wouldn’t have one take such hard turns when you install a new head. You would have a more stepped-back approach that would have longer-lasting effects, and provide for a more consistent application of the regulations that are being promulgated. That would benefit both the consumer and the consumer-financial industry as well.

PHH Corp., a lender fined by CFPB over allegedly establishing kickback schemes with several mortgage insurance companies, recently appealed their case before the D.C. Circuit. Among their defenses is that the bureau as structured is unconstitutional. Do you think they have a strong case?

The arguments are very persuasive, and I can see the court ruling in that direction. I do think it is a long shot. The separation of powers argument is just basically an aggregate of the issues with a single director. If you are putting somebody in charge that cannot be removed by the president unless there is cause, and [that person] does not have any funding oversight from Congress, he’s basically operating with no checks. That structure does not provide for the separation of powers.  

Putting aside that case, do you think there is a chance for Congress to reform the Bureau?

It is a long shot for [the justices] to come back and say it is unconstitutional or for it to be upheld. There are just too many variables. I do believe the legislative efforts that are constantly occurring in the House will gain steam from this case. All the justices had the right concerns and pointed out issues with the CFPB that the industry has had for the five years that the CFPB has been in existence. It was the first time it has been taken seriously by an appellate court. That kind of credence that the court lends to the issues will give a lot of power to the movement in the legislative branch to restructure the CFPB. I think the best chance to [reform the CFPB] is there, either through a commission structure or by putting some control over the funding of the CFPB. 


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