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Why consumer watchdog agency still has no chief

Image: Richard Codray
Richard CodrayCFPB

Senate Republicans have vowed to block President Obama’s nomination of Richard Cordray to become director of the Consumer Financial Protection Bureau unless Congress takes steps that would weaken the agency.

In a recent letter to the White House, Senate Minority Leader Mitch McConnell, R-Ky., and 42 GOP colleagues said they will continue to oppose the consideration “of any nominee, regardless of party affiliation” until changes are made to “ensure accountability and transparency” at the CFPB.

Sen. McConnell said Republicans have “serious concerns about the lack of congressional oversight of the agency and the lack of normal, democratic checks on its sole director, who would wield nearly unprecedented powers.”

Consumer groups and Democrats on Capitol Hill are outraged at what they believe is a blatant attempt to muzzle the consumer watchdog agency.

“They’re playing politics with the pocketbooks of the American people and the safety of our economy,” said consumer advocate Ed Mierzwinski of U.S. PIRG.

“Republicans are trying to dismantle the consumer protection bureau and put the power back in the hands of big corporations,” said Senate Majority Leader Harry Reid, D-Nev., in a statement. “American consumers deserve a cop on the beat to advocate for their interests against reckless corporations and their armies of lawyers seeking to take advantage.”

The outcome of this power struggle will affect all Americans because the CFPB regulates the businesses that control so much of our financial lives, including banks, credit card issuers, mortgage lenders, debt collectors and credit reporting agencies.

In just 19 months, the agency has issued numerous rules designed to bring fairness and transparency to the financial marketplace. It has also levied record fines against some of the biggest financial companies in the country, resulting in $425 million being refunded to consumers.

What exactly do GOP lawmakers want?

Republicans say they want Congress to change the CFPB’s governance, funding and oversight before they will vote on a director for the agency.

  1. Governance: They want the CFPB to be run by a five-member bipartisan commission, rather than a director.
  2. Funding: They want the bureau to be subject to the annual appropriations process in Congress.
  3. Oversight: They want to make it easier for other federal banking regulators to veto any CFPB rule.

George Washington University law professor Arthur Wilmarth, Jr. wrote an analysis of the proposed changes in a paper titled: “The Financial Services Industry’s Misguided Quest to Undermine the Consumer Financial Protection Bureau.” Here’s how he addressed the GOP’s proposed changes:

1. Governance

There are reasonable arguments on both sides as to whether the agency should be run by a director or a commission. While a single director increases accountability, a bipartisan commission might include a broader range of views. But the commission structure increases the possibility of deadlock if a single position is vacant.

Weighing all the factors – efficiency, stability, decisiveness and accountability – Prof. Wilmarth concluded that keeping a single-director makes the most sense.

2. Funding

Currently, the CFPB’s budget comes from the Federal Reserve and is capped at 12 percent of the Board’s budget each year.

If the CFPB does not have guaranteed funding and must seek Congressional budget approval each year, it is subject to Congressional whim and therefore pressure from business groups.

“The two agencies that don’t have assured funding – the Securities and Exchange Commission and the Commodity Futures Trading Commission – the industry strangles them through the appropriations process and makes them unable to accomplish their mission,” Wilmarth explained. “Obviously, the industry wants this because they don’t want the CFPB to be effective.”

3. Oversight

The federal law that created the CFPB already defines and limits its regulatory powers. It establishes various layers of oversight. The agency reports to Congress (so far Corday has testified 30 times) and is watched by the General Accounting Office.

The CFPB – unlike any other financial regulatory agency – is also subject to review by the Financial Stability Oversight Council (FSOC) which can veto any bureau rule that’s shown to put “the safety and soundness” of the U.S. banking system or the “stability” of the U.S. financial system at risk.

Republicans want to give the FSOC the power to veto any CFPB rule that negatively impacts even a single bank or financial institution.

Wilmarth believes this would make it too easy to override CFPB actions and would give responsibility for consumer protection back to “the same agencies that failed to protect both consumers and our financial markets during the past decade.”

Democrats go on the offensive

Three Democratic members of the Senate Banking Committee, Jack Reed of Rhode Island, Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts, have called on their Republican colleagues to put Cordray’s nomination to an up-or-down vote.

Confirming a CFPB director would “help consumers and strengthen our financial marketplace,” they said in a joint news release.

Sen. Warren knows more about this issue than most members of Congress. She’s the former Harvard professor who helped launch the CFPB in 2010 after it was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

She warned that this latest example of Congressional gridlock hurts everyone.

“Political stalemates don’t end in more government or less government, but in bad government – government that lacks the clarity and predictability that our businesses need to plan for the future, to serve their customers, and to create jobs,” Warren said.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitteror visit The ConsumerMan website.