July 21, 2011
Dodd-Frank @ 1: The CFPB Fight
Posted by Brett McDonnell

An invevitable part of financial regulation during a crisis is the backlash.  At some point once things return to normal, normal politics re-assert themselves, and the financial industry fights to cut back on crisis regulation.  We all knew it would happen.  What I didn't quite expect was how quick and ferocious the backlash would be.  A key struggle has been the Consumer Financial Protection Bureau (CFPB).  Republican senators have pledged to oppose all CFPB Director nominees unless three changes are made to the law.  This is yet one more example of the dubious use of procedure, in this case the power to filibuster nominations (a dubious power--the Senate should eliminate it), to gum up the process of governing until the minority gets what it wants.  Some significant power to minorities is a critical protection, but too much leads to gridlock, and we passed the too much point some time ago.  Giving in to hostage-taking is dangerous, and I don't like to encourage it.  But when I went to look more closely at the three conditions the Republican Senators are demanding, I found to my surprise that I could live with at least some of them.

The first and probably biggest demand is that the CFPB be headed by a five-person Commission rather than a single Director.  Consumer activists are unhappy with this.  They have visions of Elizabeth Warren imposing her compelling vision at the head of a powerful agency.  Heady stuff, but it is time to set those visions aside.  A commission is more clumsy and subject to political infighting, but it also yields useful diversity of viewpoints and can provide a counterweight to over (or under) regulation.  It may also diffuse the attention being focused on the nomination of one Director.  And consumer activists should start thinking about the CFPB after a Republican President and Senate are in power--it may well happen as soon as Jan. 20, 2013.  Two minority Democratic commissioners would look pretty attractive in those circumstances.  This is on balance a useful change, and at any rate one consumer activists should be willing to live with as a condition for getting the CFPB up and running.

The second condition is to remove the CFPB's independent funding and subject it to the Congressional appropriations process.  I'm much more skeptical about this.  Yes, accountability is a value, but there are other accountability mechanisms already in place, and agency independence is a major value too, especially for an agency that's meant to advance the interests of consumers.  The politics of regulatory capture make that a hard task; independent funding reduces somewhat the pressures favoring industry capture.  I think the President should fight this proposal.  But, should that prove impossible, and given the genuine value of accountability, perhaps some compromise would be possible without undermining independence too much.  Consider, for instance, an arrangement like this:  if the Fed Board disapproves strongly enough of the CFPB's budget request (currently the CFPB gets to set its funding up to a certain percentage of the Fed's budget), the Fed could submit a proposal for a lower amount.  If both branches of Congress and the President approved, that's what the CFPB would get; otherwise, it would receive the amount it requested.  Thus, the CFPB's level could be lowered only if all four of the Fed, House, Senate, and President agreed it was too high--a pretty stringent requirement, maintaining a real degree of independence while increasing accountability somewhat.

The third condition would strengthen the ability of other regulators to block CFPB rules.  Dodd-Frank already allows the Financial Stability Oversight Council (FSOC) to veto a new CFPB rule on a 2/3 vote if the FSOC determines that the rule "would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk."  A Republican bill, H.R. 1315, would reduce the vote for a veto to a simple majority, and would lessen the standard to a determination that the rule "is inconsistent with the safe and sound operations of United States financial institutions."  The existing rules probably already go too far in giving financial regulators, too often dominated by the industry, power to limit the CFPB.  The Republican proposal increases that power, so I'm not happy with it.  Then again, I'm not sure the difference between 1/2 and 2/3 or between the two vague statutory standards is worth fighting over.

So although I hate to suggest it, I do think there's the basis for a compromise here, assuming of course that Democrats could get a firm commitment to approval of a slate of commissioners to get the CFPB up and running.  I'm actually somewhat ambivalent about the CPFB--as I discuss in my Don't Panic overview of Dodd-Frank, I do think there's a real risk it may over-regulate.  But I think benefits from having a strong pro-consumer voice at the regulatory table outweigh those risks.  It's looking like that pro-consumer voice will be a lot less strong than I had hoped.  Still, even if a compromise version of some of the proposed changes comes to pass, better a weak voice than no voice at all.

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