While it is very likely Obama violated constitutional law and surely decades long presidential and Justice Department precedent and rulings, that is a side show to the potentially severe damage he has just done to single family housing, and to the entire residential mortgage industry, from originators to servicers. There were a number of regulatory rules and implementations which the Dodd Frank law said could not be triggered until a director was confirmed. Ignore the fact that Cordray was not legally appointed and definitely not confirmed as specifically required by Dodd Frank, he is in place for now and has already triggered all of those pending rules and much worse. Litigation to unseat him will take a very long time. His very first act was to post on the internet, that the public needs to start sending in complaints. As Ohio AG he used tort lawyers to go after banks, thereby saving funding for litigation and encouraging class actions. He intends to do the same now. Keep in mind he sets his own budget and he gets 10% of the budget of the Federal Reserve with Congress having no say at all. The bank regulators now have full authority, and are mandated, to go after non-bank financial companies.

The regulators manual now says, in so many words, go out and find “unfair and abusive practices”. In short, if you are an examiner it is your job to find something you determine is unfair. There is no working definition of unfair, so you can imagine a zealous examiner who has been instructed to go into the field and find things to pursue. That is what you are going to witness. In addition, there seems to be no clearly defined privilege for internal audit docs, internal manuals and risk procedures. Nor for your files. Cordray intends to share them with state AG’s who we know are really politicians trying to look like they are there protecting the poor, taken advantage of borrower. They will be shared with various tort lawyers. You can count on some big bank or servicer appearing in the NY Times or on CNN with confidential files showing up. Reputational risk just got ramped up way beyond what it already was.

There is now a rule that the lender must do everything it can to be certain the borrower can repay. Just checking a W-2 is apparently not sufficient anymore. It would seem the onus is now on the lender to find out when he is being defrauded by the borrower, and if he is defrauded, it is potentially his fault for not knowing. There are a myriad of other rules coming that relate to servicing, risk management, internal audit procedures and the like. The problem is nobody knows what the rules are, or how they will be implemented, so even the best consultants and lawyers can only say –here is what is known, so do this, but they still do not know all that is coming the limits, if any of how they will be interpreted by a zealot as director who has his own political ambitions to be governor of Ohio and a president seeking reelection on a platform of, get the banks.