“A wise and frugal government which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”
Checks & balances needed on new financial bureaucracy
In the compulsion to enlarge government and vest expansive powers in a new regulatory agency, President Obama and congressional Democrats created the Consumer Financial Protection Bureau (CFPB) as part of the Dodd-Frank permanent bailout of Wall Street law. Consolidating the regulatory responsibility for compliance with consumer protection laws—previously the domain of the states and other federal regulators such as the Federal Trade Commission (FTC)—the CFPB was designed to hold primary supervisory and enforcement power over large depository institutions, as well as non-bank financial institutions such as credit card companies and payday lenders.
But the CFPB’s reach goes further. The bureau is also authorized to prescribe rules and issue orders over any entity that “poses risks to consumers with regard to the offering or provision of consumer financial products or services.” This could be construed to include financial advisers such as Dave Ramsey or Suze Orman, colleges or universities involved in issuance of financial aid or student loans, or property owners seeking to offer a lease on an apartment. Obviously, the scope of the CFPB is large, still somewhat undefined, and could affect numerous sectors of the economy if the political powers that be deem an activity related to consumer protection. For these reasons, it is imperative that the bureau be subject to the same constraints as other regulatory bodies to prevent political abuses of power and allow Americans to have oversight of its activities through their representatives in Congress.
Elements of concern
No accountability: The CFPB’s annual funding is allocated by the Federal Reserve, not Congress, and is therefore not subject to the normal appropriations process. The Bureau will also receive funds from penalties and fees that it levies but it will not remit those funds to the Treasury as do other financial regulators. While the administration argues that this lack of funding accountability will ensure the CFPB the independence of authority to “level the playing field between small banks and non-bank financial providers,” even the banking industry has called its bluff. Testifying before the Senate Banking Committee in July the American Bankers Association (ABA) said, “[I]t is ABA’s first priority to improve the accountability of the Bureau. Establishing accountability supersedes other important priorities regarding the Bureau, including ensuring appropriate bank-like supervision of non-banks for consumer protection.”
No oversight: With such a wide swath of rule writing authority, prudence would dictate that other supervisory bodies, such as the safety and soundness regulators, have input on the CFPB’s decisions that may drastically affect the economy. Yet the structure set up by Dodd-Frank is pretense masquerading as oversight. A CFPB rule can only be overturned by the Financial Stability Oversight Council (FSOC) if the rule puts at risk the entire U.S. banking system or imperils overall financial stability, meaning that even if a CFPB ruling caused the failure of multiple banks the FSOC would have no standing to challenge the rule—not to mention that the Director of the Bureau is a voting member of the FSOC. That is to say, in the event that there was a motion to set aside a CFPB regulation, the scales are tipped. With taxpayers likely on the hook for any large bank failures, it is imperative that consumer regulation be more carefully coordinated with prudential bank regulation.
Concentrated power: The CFPB is the only financial regulator designed to have a single director who cannot be fired for policy decisions and who will determine the bureau’s budget and spending priorities. Moreover, the Director, with an expansive jurisdiction, will have unfettered authority to decide which financial products consumers can buy and how much they will pay for them. No regulator will have more influence over the financial lives of Americans. This blatant violation of Constitutional principles granting one unelected person so much power without effective checks and balances is sure to end up restricting credit and raising prices at best.
President Obama puts politics over good policy
In July the House approved with a bipartisan vote H.R. 1315 to address these concerns. The Consumer Financial Protection Safety and Soundness Improvement Act of 2011 would establish the CFPB as a five-member, bipartisan Commission to carry out all of the duties that would otherwise fall to the Director of the CFPB. Additionally, the bill would amend the FSOC’s review procedures to address concerns that CFPB’s rules and regulations could undermine the safety and soundness of U.S. financial institutions. Senate Republicans have also called for the CFPB to be subject to the congressional appropriations process.
Unfortunately, President Obama continues to ignore these legitimate concerns, and this week the administration issued a report intended to pressure the Senate to approve his nominee, Richard Cordray, as the Director of the CFPB. Because the bureau is not fully vested with its powers until a Director is confirmed, Senate approval of Mr. Cordray is the only thing preventing the largest transfer of regulatory power in the nation’s history. Senate Banking Committee Chairman Sen. Richard Shelby (R-AL) has said the nomination is “dead on arrival” until reasonable changes are made. But the priorities of sound policy and accountability in government will likely take a back seat to the president’s campaign agenda of portraying Congress as intransigent.