Bank Watchdog a Paper Tiger

NEW YORK ( TheStreet) -The Consumer Financial Protection Bureau and new Director Richard Cordray have the financial services industry running scared, though it's difficult to see why.

American Express ( AXP) vice chairman Ed Gilligan sure made the new consumer cop sound threatening when he spoke at an industry conference hosted by Citigroup earlier this month.
Richard Cordray, Director, Consumer Financial Protection Bureau

"The Consumer Protection Bureau is a new regulator that comes in with broad powers that cuts across everyone who's operating in the consumer business in financial services and probably beyond that as well. So it introduces a lot of change, and no one quite understands yet how that will come in and how things transition from existing regulators to the CFPB," Gilligan said.

In a note following the conference, Citigroup analysts referred to the regulator as "a risk for investors to keep an eye on and one we are getting more nervous on."

And in case that's not scary enough, there's this--again from the Citigroup report: "our regulatory contacts believe at a minimum it could be a back door vehicle for things like studies."

Studies? Boy, it's a good thing JPMorgan Chase ( JPM) chief Jamie Dimon trained as a boxer so he can defend himself.

Certainly Cordray has demonstrated he will take on the banking industry. As Ohio Attorney General, for example, he sued Bank of America ( BAC)in 2009, arguing the bank hid losses at Merrill Lynch to get shareholders to sign off on Bank of America's acquisition of Merrill. The lawsuit has yet to be resolved.

His appointment to lead the bureau was mired in controversy, with President Obama eventually bypassing Congress after Republicans held up the nomination on the grounds that the structure of the bureau gave the director too much power.

Some attorneys believe the opposition to Cordray's appointment will continue.

"It's certainly an issue that I'm sure somebody else is going to challenge," said Indiana Attorney General Greg Zoeller, who nonetheless indicated he himself had no plans to do so, as he is currently occupied with other matters, including a 26-state challenge to the president's health care law.

Despite all the fuss, the initial issues being targeted by the CFPB do not appear to represent that serious a threat to big financial companies like Bank of America, Wells Fargo ( WFC) or Amex.

A CFPB spokeswoman said Cordray wasn't available for an interview.

So far, at least, the main targets of the CFPB's attention appear to consist of small, short-term loans that charge exorbitant rates of interest such as overdraft fees or "payday" loans.

The companies likely to be most affected by such a crackdown are Advance America ( AEA), Cash America International ( CSH) and QC Holdings ( QCCO)--not exactly household names.

And even these relatively small companies are hoping to find a way to make nice with their new regulator so they can stay in business.

"I don't think we feel we have an unusual target on our backs," says Advance America spokesman Jamie Fulmer, who uses words like "level playing field," "full disclosure," and "simplicity," to describe the goals of the CFPB.

"All those are things we wholeheartedly agree with," Fulmer says.

While it is true that big banks including Wells Fargo, Regions Financial ( RF), US Bancorp ( USB) and Fifth Third ( FITB) offer payday loan-type products, they are likely to have a great deal of ammunition in making the argument that they do so in a "responsible" way.

Wells Fargo spokeswoman Richele Messick says the bank has offered the product since 1994 for emergencies only, is very upfront with customers about how expensive it is, and moves quickly to cut them off if they use it too frequently.

Jean Ann Fox, who tracks financial services issues for the Consumer Federation of America, hopes the CFPB will take a tougher stance on overdraft fees. While Dodd Frank legislation required banks to get customer consent before charging overdraft fees, Fox doesn't believe that measure has been effective in curtailing the practice.

Overdraft fee revenues fell to $31.6 billion in 2011 from $33.1 billion in 2010 and $37.1 billion in 2009 according to Moebs Services, which tracks data on financial institutions. However, in launching an inquiry into the practice last month, the CFPB contended that the average overdraft fee "ranged from $30-$35 in 2011 and has increased by 17 percent over the past five years."

While an overdraft fee crackdown by the CFPB would obviously not be good news for banks, such a prospect is likely at this point to be viewed by the industry as just one of countless nuisances threatening to take a bite out of profits in the wake of the 2008 crisis.

Given that Cordray appears to have his sights on the Governor's office in Ohio in 2014 he likely wants to be more than a minor nuisance to the banking industry. How he will look to make his mark remains to be seen, but it may be that mystery that worries financial services executives more than any specific item so far on the CFPB's agenda.

One way Cordray could have a big impact is if he brought enforcement actions against companies and got them to admit their guilt. The Securities and Exchange Commission has been criticized recently for its longstanding practice of settling with companies it regulates while allowing them to "neither admit nor deny" wrongdoing. The SEC has said companies won't admit guilt for fear of exposing themselves to big damages in civil litigation.

However, Iowa Attorney General Tom Miller does not expect the CFPB to make admission of guilt a priority in enforcement cases it brings.

"In cases that are not extraordinarily egregious, it's going to be difficult," Miller says. "I think the debate over admissions is somewhat blown out of proportion."

So where else can Cordray make a name for himself? Indiana's Zoeller argues swinging for the fences on a big mortgage case is a risky strategy since those can be difficult to prove.

"I think it's more likely that the CFPB will tackle some of the abuses that are more common and less difficult to prove, so it's not necessarily which are the highest priority but which ones can we make an immediate impact on. I think some of the credit card abuses in collections and some of the abuse of people in the military, there's a whole series of elderly abuse--so you look at targeted communities," he says.

If the CFPB makes consumers feel better about dealing with financial companies, it could actually end up being helpful to the industry as it looks to restore its battered image. Iowa's Miller believes the bureau serves an important role, as the Federal Reserve, charged with ensuring the safety and soundness of the banking system, cannot also be expected to do a good job of looking out for consumers..

But don't tell that to Indiana's Zoeller.

"I think Rich Cordray and the way they've structured this--it will all start off very well and I'm confident the attorneys general can work together and have a common platform but again as somewhat of a student of government and bureaucracy I can tell you: you give Congress 10-20 years, you bring in new players to the CFPB and new administrations, new attorneys general and I don't know that people will always be as happy with what was created as they may be at the beginning."

Helpful at best and a nuisance at worst. If you're a financial company, that doesn't sound like such a bad deal.

-- Written by Dan Freed in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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