Causing a furor before it exists

Original Reporting | By James Lardner |

May 12, 2011 — With the passage of last year’s Dodd-Frank reform law, the 111th Congress called for the creation of a Consumer Financial Protection Bureau. Now, two months before its scheduled launch date, the ascendant Republicans of the 112th Congress are trying to limit the bureau’s power by making basic changes to its authority and architecture.

“It’s not like the history of bank regulation or consumer product regulation in the United States suggests that the overwhelming problem is that the public voice is heard too loudly and special interests are silenced,” Lisa Donner said.

The House Committee on Financial Services moved last week toward approval of legislation that would put the new CFPB under a bipartisan commission rather than a single director, while enhancing the ability of a panel of traditional bank regulators to veto consumer-protection rulings that, in their view, jeopardize financial “safety and soundness.” Meanwhile, 44 senators (all the Republicans, except Scott Brown of Massachusetts and Lisa Murkowski of Alaska) signed a letter to President Obama declaring that until the White House agrees to similar limits on the bureau’s power, they will refuse to vote for a nominee — any nominee — to run it.

At first glance, it was hard to understand the urgent need to reorganize an agency that hasn’t had a chance to do anything yet. Outside observers might also have been startled by what a number of congressional Republicans identified as their underlying concern: the danger of having a financial regulatory body that simply cares too much about consumers, and too little about banks.


Hand in hand

One pending proposal — put forward by Rep. Sean Duffy (R-WI) — would allow a council of financial regulators to overrule, by majority vote instead of the two-thirds requirement set by Dodd-Frank, any CFPB action it sees as a safety-and-soundness threat. Duffy’s bill would also allow for consideration of the impact on “financial institutions” rather than just to the system as a whole (see box).

Critics of the CFPB in its present form argue that consumer protection and safety-and-soundness go “hand in hand,” as Rep. Shelley Moore Capito (R-WV) said recently, because many bank practices (loan underwriting, for example) have consequences for both.

The Bureau’s supporters make two basic counter-arguments. What Duffy, Capito, and others are seeking, according to Rep. Brad Miller (D-NC), is a restoration of the old model of regulation — one in which, Miller told Remapping Debate in a phone interview, “all of the prudential regulators that had supposed consumer-protection responsibility put [that] protection way to the bottom of their list of responsibilities.”

It was because of that history, Miller said, that Congress decided to establish a stand-alone financial protection agency. The record of recent experience suggests that a financial system that pays more attention to consumer protection will also be a more stable system, Miller added. “If you trap consumers in debt that they cannot pay, it’s bad for the consumers immediately,” he said. “It was very bad for consumers in the early and middle part of the last decade, and eventually it caught up with the lenders as well.”

The CFPB is needed, said Lisa Donner, who oversees a consumer-labor coalition known as Americans for Financial Reform, “both in order to make sure that people aren’t gouged and treated unfairly day to day, and because if they’re allowed to be treated unfairly and gouged in the consumer market, that can be, and just was, profoundly risky for the system as a whole.”

Drafted to protect safety-and-soundness…or something else?

In its single-minded focus on consumer protection, critics say, the Consumer Financial Protection Bureau could take steps that ignore the competing interests of financial safety-and-soundness.

Such concerns were aired in the debate over the bureau’s creation, leading to a number of provisions that already limit its authority.  Under the Dodd-Frank law that set up the CFPB, a body known as the Financial Stability Oversight Council, which includes representatives of the Federal Reserve, the Office of Comptroller of the Currency and the Federal Deposit Insurance Corporation (as well as the CFPB itself), can veto any rule that seven of its ten members judge to “put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk.”

That language set the bar too high, bank lobbyists and congressional Republicans now argue. Under their revised formula, only five votes would be required (a majority of the council, with the CFPB director excluded). Moreover, the council could veto any rule viewed as “inconsistent with the safe and sound operations of United States financial institutions.”

The idea, according to its author, Rep. Sean Duffy (R-WI), was to guard against a threat to the safety-and-soundness of one part of the industry, such as credit unions or community banks. But defenders of the CFPB protest that the new wording would permit a veto on far slighter grounds. The Duffy bill, Rep. Brad Miller (D-NC) told Remapping Debate, could make it hard for the CFPB to issue a rule that causes financial harm to a few banks, even if the profits threatened by the rule came from “taking advantage of consumers.”

The language of Duffy’s proposal seemed to raise questions. Why wasn’t it limited to rules affecting a sector or defined segment of the banking industry? Couldn’t a consumer-protection requirement be consistent with the safe and sound operations of a vast majority of banks — or actively promote safety-and-soundness for those banks — even while making it harder for other banks to thrive? Could the failure of certain institutions, under such circumstances, even be considered a positive result (that is, one that clears the marketplace of less reputable operators)?

Remapping Debate was anxious to put these questions to Congressman Duffy in light of the fact that two banking lobbyists we interviewed had seemed to interpret his legislation as covering a rule that put the “safety and soundness” of even a single institution at risk. But, as noted elsewhere, the congressman and his staff did not respond to our repeated requests for an interview.

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