Post Warren, the Battle Over the CFPB is Far From Over

Remember “I’m Just a Bill,” that famous educational video about how a proposed piece of legislation in Congress becomes a law? What the makers of Schoolhouse Rock neglected to mention is that they merely described Step One. Next comes Step Two, in which federal agencies decide the law’s specific rules, and how those rules will be enforced, much like filling in a rough sketch with paint.

Sometimes there’s even a Step Three, in which Congress tweaks or overturns the law, either in part or in full. This happens mostly after a new party takes control over a house of Congress, and wants to revisit controversial laws passed by their opponents.

It’s hard to think of a contemporary law that’s more important, and more controversial, than the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The controversy reached a new level Monday when President Obama announced his plans to nominate former Ohio Attorney General Richard Cordray to lead the Consumer Financial Protection Bureau, the creation of which was mandated by Dodd-Frank. The move avoids a potentially larger fight over Elizabeth Warren, the combative consumer advocate who was long a favorite to lead the bureau. But the decision to tap Cordray, who is currently the bureau’s enforcement chief, rather than give in to Republican demands to scrap the director’s role altogether, guarantees continued Republican resistance.

[Related article: Obama Taps New Consumer Watchdog]

“Until President Obama addresses our concerns by supporting a few reasonable structural changes, we will not confirm anyone to lead it,” Senator Richard Shelby, the ranking Republican on the banking committee, said Sunday.

The bureau’s job is to do for mortgages and credit cards what the Consumer Product Safety Commission does for toasters and toys: Prevent companies from selling products that harm consumers.

Many Democrats and consumer advocates say that’s vitally important, since risky mortgages, and related side bets like mortgage-backed securities and credit default swaps, caused the financial crisis. By preventing such abusive practices in the future, and helping all market players stay better informed, Democrats argue, the new bureau will help Wall Street avoid another speculative bubble and inevitable crash.

“I think a lot of the fear about the CFPB is unfounded,” says Pamela Banks, senior policy counsel for Consumers Union. “It’s about making an informed decision based on information you can read and understand and not legalese or gobbledygook, and being able to compare apples to apples when it comes to financial products.”

Many Republicans and banking industry leaders disagree. They say the bureau’s powers extend far beyond making financial products easier to understand, and could prevent companies from creating innovative new products.

“I think it has the potential for being pretty powerful,” says Robert Clarke, former Comptroller of the Currency under Presidents Reagan and George H.W. Bush. “The biggest problem I have with it is I think when you have a focused agency like that, you run the risk of having a bunch of zealots running it who are not the least bit concerned with safety and soundness considerations” of financial institutions.

[Article: How the CFPB Should “Regulate” Credit Reporting and Credit Scoring]

Many Republicans also oppose the bureau because they disagree with Democrats’ assertion that excessive risk-taking on the part of financial institutions—rather than government requirements for banks to give mortgages to low-income people—caused the crisis. From this perspective, the Consumer Financial Protection Bureau attacks the wrong problem, and its new layers of regulation could prevent financial services from creating the one thing that can end this recession: Jobs.

“I think there’s clearly that risk of the CFPB putting credit unions and other small financial institutions out of business,” says Fred R. Becker Jr., president and CEO of the National Association of Federal Credit Unions.

A Two-Pronged Strategy »

Official White House Photo by Lawrence Jackson, via Flickr.com.

A Two-Pronged Strategy

Given their fierce opposition to Dodd-Frank in general, and the Consumer Financial Protection Bureau in particular, it’s no surprise that Republicans made big use of steps two and three of the lawmaking process to kill the bureau, or drastically limit its power, almost as soon as they took control of the House of Representatives in January 2011.

On the administrative front, Republicans have held multiple hearings to chastise Elizabeth Warren, the president’s special assistant in charge of setting up the agency, for her role in advising state bank regulators on their investigation into illegal mortgage servicing practices that led to thousands of homeowners being evicted illegally.

Some of those hearings became downright hostile, like the one in May in which Patrick McHenry (R-NC) accused Warren of lying.

On the legislative front, Republicans introduced more than a dozen separate bills to decrease the bureau’s authority. Some of the bills were redundant, and eventually they were reduced to four. All four passed out of committee. They all may receive votes on the floor of the House as soon as this week.

[Related article: Congress Quietly Charts a Path for the Consumer Financial Protection Bureau]

The Bills to Decrease the CFPB’s Authority

H.R. 1

This is the Republican budget bill, which includes more than 400 amendments regarding different ways to reduce the national debt. One section of the bill would cut funding for the Consumer Financial Protection Bureau and other financial industry regulators. The bill would cut the agencies’ budgets by 9% overall.

For the bureau, the Republican budget would mean an end to its financial independence. Under Dodd-Frank, the bureau’s budget is set as a percentage of the Federal Reserve’s funding, most of which comes from fees levied on financial firms.

If passed as currently written, the House budget proposal would change that, bringing the bureau’s budget under the direct control of Congress. It also would cap the budget at $200 million a year, compared to the $550 million the bureau is scheduled to receive under its current funding scheme.

Republicans say the budget changes are needed to place a check on the administration’s power, and make the bureau more transparent and accountable to taxpayers.

“The Congress’s ultimate authority over the administration in a balance of powers under Mr. Jefferson’s Constitution is the power of the purse,” says Becker. “That check doesn’t exist under the current structure.”

The bureau’s defenders counter that cutting the CFPB’s budget, and bringing it under Congressional authority, would strip it of its power to act independent of political pressure from legislators who receive considerable campaign donations from Wall Street. It’s worth noting that all other bank regulators get their funding from the Federal Reserve Board. If the CFPB operated under the Congressional budgetary umbrella, it would be an exception to that rule.

“Subjecting the budget to the appropriation process is just another opportunity to politicize the whole process,” Banks says.

[Article: Obama: I’ll Veto Any Bank Regulator Budget Cuts]

H.R. 1121

H.R. 1121 eplaces the bureau’s single director with a bipartisan five-member commission. The Obama administration’s announcement of its plans to nominate former Ohio Attorney Cordray to become the bureau’s director ended months of speculation over whether Obama would nominate Warren, a favorite of liberal and consumer groups who is widely reviled on Wall Street.

But Cordray’s nomination is unlikely to end the fight over H.R. 1121 and Republican efforts to change the bureau’s leadership structure. In May, 44 Republican Senators wrote a letter to President Obama saying they would block any nominee, whether it’s Warren or someone else, until the administration agrees to change the bureau’s leadership structure and budget.

“Until President Obama addresses our concerns by supporting a few reasonable structural changes, we will not confirm anyone to lead it,” Senator Richard Shelby, the ranking Republican on the banking committee, said in a statement on Sunday.

A three- or five-member board would naturally provide “a more balanced approach to regulation,” Becker says, “and also prevents you from the situation where Democrats come in and you go left, and Republicans come in and you go right. It’s more stable.”

Some consumer advocates counter that replacing the director’s job with a committee waters down the bureau’s focus and authority.

“These proposals put the foxes in charge of the chicken coop,” says Ed Mierzwinski, director of the consumer program at the U.S. Public Interest Research Group.

The Bills (cont.) »

H.R. 1315

This bill would increase the power of the Financial Stability Oversight Panel to overrule decisions by the Consumer Financial Protection Bureau. The panel, which consists of the leaders of regulatory bodies including the Securities and Exchange Commission and the Federal Deposit Insurance Corp., was created by the Dodd-Frank Act to monitor the financial services industry for risky trends that could endanger the broader economy. It is specifically empowered to look over the bureau’s shoulder, and make sure that any of the bureau’s decisions regarding consumer protection do not endanger the safety and soundness of systemically important financial institutions or the economy as a whole.

“The consumer agency is the only agency that is subject to a veto by other agencies,” Warren told the House Committee on Oversight and Government Reform last week.

But according to Republicans, the panel is more of a straw man than an actual check on the bureau’s power. That’s because its five-member board must obtain a supermajority before it can actually reverse any of the bureau’s decisions. H.R. 1315 changes that requirement to a simple majority. That’s important, Republicans believe, because the bureau is the only regulator focused on consumer protection.

That narrow focus could prevent it from understanding the broader economic impacts of its decisions, Clarke says. In reality, its check on the bureau’s power may be quite modest.

“It is a constraint, but I think its more theoretical,” says Donald Lamson, who spent 30 years as a bank regulator with the Office of the Comptroller of the Currency, and helped the Treasury department draft its proposal regarding the creation of the bureau. “It provides an incentive for members to provide informal comments and to be collegial.”

Critics say the proposal could significantly weaken the bureau because it gives final authority over consumer protection rules to agencies that failed to protect consumers during the housing bubble and crash.

“We need the CFPB because the current bank regulators never did their consumer protection job,” Mierzwinski says.

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HR 1667

This bill would prevent the Consumer Financial Protection Bureau from becoming operational until it has a Senate-confirmed director in place. Of all the bills introduced, H.R. 1667 best demonstrates Republicans’ efforts to limit the power of the new bureau because if successful, it would place the bureau in a double blind.

The bill bans the bureau from assuming power until a director is approved by the Senate. Simultaneously, Republicans also have vowed to block any nominee to lead any executive agency unless the administration agrees to change the bureau’s leadership structure and get rid of the director’s position altogether.

Which leads to an interesting theoretical question. If HR 1667 were to pass, and the administration caves to Republicans’ demands to change the CFPB’s structure, could the bureau ever legally assume power, since in that case, a director would never be confirmed to a job that doesn’t exist?

Some consumer advocates say that’s exactly the desired effect.

“The folks who are supporting these bills are straightforward about the fact that they want to kill this bureau,” says Lisa Donner, executive director of Americans for Financial Reform. “Separately and combined these are efforts to do that. ”

Supporters of the bill say they’re just trying to promote transparency.

“Allowing the new Bureau to come into existence without a confirmed director in place would open the door to confusion and uncertainty about the focus and direction of the bureau,” Berger wrote in a letter to members of the House Committee on Financial Services.

[Related: The Elephants in the Room: The GOP’s War on Consumer Protection]

Handicapping the Chances »

Handicapping the Chances

What are the chances that any of these bills will actually become law? Here’s the simple answer: Zero. The Republicans may have control of the House. But the Senate and the Oval Office are controlled by Democrats, whose support for the Consumer Financial Protection Bureau has not waned since Dodd-Frank passed a year ago. For emphasis, the Obama administration issued a warning last week, saying the president would veto any budget bill that included cuts to the bureau and other financial regulators.

Watching the bills themselves is “keeping your eye on the wrong ball,” Lamson says. “As long as the Senate remains Democratically controlled, there will be no legislation to survive that would limit further the CFPB.”

That’s not necessarily the whole story, though. Issues much larger than the future of the Consumer Financial Protection Bureau currently dominate Washington, primary among them the entire federal budget and the debt ceiling. In the high-stakes poker game currently being played to resolve these major impasses, all kinds of seemingly unrelated things, like the bureau’s leadership structure, could become chips on the table.

“The big story on the front burner this week is of course the debt ceiling, and any number of things can get thrown into the mix to produce a majority,” Clarke says.

In the larger scheme of things, though, the immediate question of whether any of these bills has a chance of becoming law may be secondary to the larger political battle. Republicans score two forms of political capital by attacking the CFPB, even if those attacks are largely futile in the short-term.

First, appearing to take a tough stand against the creation of a new layer of government bureaucracy solidifies Republican legislators’ relationships with Tea Party activists and other more radical elements of the party who are primarily motivated by the fear of growing taxes an government.

“This is a group that has exercised influence far beyond its numerical strength, in part because it’s so intransigent,” says Christopher Arterton, a professor of political management at George Washington University.

Second, there’s the money. Most Americans are not paying any attention to the ongoing battle over Dodd-Frank and the CFPB, Arterton says.

But one group of people is paying very close attention indeed: The Wall Street bankers and traders whose profits are on the line.

“The audience for this topic may be small, but it is highly influential, full of big campaign donors. Unlike the general public, business is paying close attention,” says Larry Sabato, director of the University of Virginia’s Center for Politics. “They know which party is siding with their interests, and which one isn’t. This will be reflected in money contributed to 2012 campaigns.”

Meanwhile, support for Dodd-Frank may be quite broad, but it doesn’t run very deep. And the Consumer Financial Protection Bureau is just too obscure for most people to know about, many political scientists say.

“It’s a safe bet that a very large majority of the public has no clue about any of this,” says Sabato. “Whenever I have mentioned Dodd-Frank in speeches, even to very well educated crowds, puzzled looks fill the auditorium.  So most people never knew it happened.”

That doesn’t mean big changes to the bureau are inevitable. But it does mean that the bureau’s supporters have a lot of work to do. Wall Street firms “have an almost bottomless pit of resources here, and there’s a lot of money at stake, and they’re spending,” Donner says. “And we have incredibly limited resources,” she adds. “It is David versus Goliath, for sure.”

No matter what Donner and her coalition do to maintain the Consumer Financial Protection Bureau in the form originally envisioned by Dodd-Frank, they will have to contend with a large, well-funded and patient opposition that is pushing in the opposite direction.

“I think in this climate right now it would be very difficult to replace the bureau,” says Clarke. “Is it possible to get rid of bureau? Oh I think it’s possible.”

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