GOP Lawmakers Challenge Authority of Consumer Finance Agency

Elizabeth Warren photoElizabeth Warren (see photo) is an anomaly: a Harvard law professor and an outspoken populist. But as a ranking member of the Obama administration, she and her office are fast becoming unpopular – at least among many congressional Republicans. Since last September, Warren has served as acting director of the Consumer Financial Protection Bureau (CFPB), a powerful watchdog agency created by last year’s financial reform overhaul. The CFPB doesn’t open its doors until July 21. But already several members of Congress, led by House Financial Services Committee Chairman Spencer Bachus, R-Ala., think this watchdog needs a leash. Toward that end, they’ve introduced three bills, each approved by a subcommittee last week. And they’ve informed President Obama they have the votes to block his nomination for permanent director should he oppose the measures. The full committee is set to take up the bills today. 

The Wall Street Reform and Consumer Protection Act (P.L. 111-203), sponsored by Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., and signed by President Obama last July 21, is proof that almost anything, good or bad, can fly under the banner of “reform.” The 16-title legislation, enacted with relatively little debate in the wake of the 2008 stock market and banking meltdown, established new and rigorous standards for the financial industry. President Obama in June 2009 had introduced his own proposal, which he termed “a sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.” The Democrat-dominated Congress eventually gave the president most of what he wanted. The law’s stated purpose: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” It sounds almost too good to be true. And it probably is.

Title X of the Dodd-Frank legislation created the Consumer Financial Protection Bureau. Though housed under the Federal Reserve, the bureau would operate independently and would have veto power over many of the operations of bank and nonbank intermediaries. Its director, appointed by the president for a five-year term, would be vested with discretionary authority rivaling that of any White House “czar.” This Fed-within-the-Fed would be divided into five units: 1) research; 2) community affairs; 3) complaint tracking and collection; 4) fair lending and credit opportunity enforcement; and 5) promotion of consumer financial literacy. A new Consumer Advisory Board would assist the bureau in all phases of operations. And like the Fed chairman, the CFPB director would report to the House and Senate banking committees biannually.

A group of House Republicans are troubled by the prospect of this sudden command-and-control addition to the federal bureaucracy. “If George Washington came back today, or Abraham Lincoln, or if Warren Buffett signed up, I wouldn’t give that person total discretion,” remarked Rep. Bachus in a March speech to the U.S. Chamber of Commerce, emphasizing that the problem is less Mrs. Warren than the centralized authority of her position. The director, he said, single-handedly could determine whether a particular consumer financial product is abusive or otherwise unfit for marketing. Bachus is the chief sponsor of a bill, the Responsible Consumer Financial Protection Regulations Act of 2011 (H.R. 1121), that would amend Section 1017 of the Dodd-Frank Act by replacing the director’s position with a five-member commission and subject the agency budget to the congressional appropriations process. On Wednesday, May 4, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, chaired by Rep. Shelley Moore Capito, R-W.Va., approved the measure by a 13-to-7 vote.

Bachus, who last November along with Rep. Judy Biggert, R-Ill., wrote the Federal Reserve and the Treasury Department questioning the legality of Warren’s authority to set up the CFPB, is in good company in expressing concern over the potential for unchecked bureau power. Two other House bills also would limit the scope of the agency’s power. Subcommittee Chairman Capito’s Bureau of Consumer Financial Protection Transfer Clarification Act (H.R. 1167) would ensure that a Senate-confirmed CFPB director is in place before the transfer of regulatory authority from existing agencies takes place. In the event there is no confirmation by July 21, the bureau may operate under the authority of the Treasury Secretary. The subcommittee on May 4 approved the measure by 13-8. Additionally, the Consumer Financial Protection Safety and Soundness Act (H.R. 1315), introduced by Rep. Sean Duffy, R-Wisc., clarifies that the 10 voting members of the Financial Stability Oversight Council must set aside any CFPB rule deemed inconsistent with safe and sound operations of U.S. financial institutions. The measure also would change the minimum council vote necessary to set aside regulations from two-thirds to a simple majority. The subcommittee approved the bill on May 4 by 13-9.

Meanwhile, over in the Senate, 44 Republican senators, led by Richard Shelby, also of Alabama, ranking Republican on the Senate Banking Committee, signed a May 2 letter supporting the main goals of the Bachus bill. The letter, which was delivered to President Obama, read in part: “No person should have the unfettered authority presently granted to the director of the Consumer Financial Protection Bureau. Therefore, we believe that the Senate should not consider any nominee to be CFPB director until the CFPB is properly reformed.” Only two GOP senators, Scott Brown of Massachusetts and Lisa Murkowski of Alaska, declined to sign the document.

Elizabeth Warren, who played a key role in launching an investigation by several federal agencies and all 50 state attorneys general of industry mortgage foreclosure practices (the settlement of which is currently in negotiation), isn’t about to yield. At the same Chamber of Commerce conference at which Congressman Bachus spoke, she denounced the idea of subjecting her agency’s budget to congressional approval as opening the door to lobbying by banks to cut funding. “This is not a prescription for fair and even-handed enforcement,” she said. Senate Banking Committee Chairman Tim Johnson, D-S.D., also disdains the recent efforts by the GOP. “Republicans fought the creation of a strong consumer watchdog from the start and now they are at it again,” he said in a prepared statement.

These and other critics of the House bills, especially Rep. Bachus’ H.R. 1121, seem entranced by the notion that a single director, unhampered by a commission, will be a beacon of decisiveness and accountability, cutting through bureaucratic inertia like a laser beam. The all-too-common reality in such situations, however, is that such an individual, even where well-informed and intentioned, is prone to making decisions in a vacuum – which is to say, decisions people come to regret later on. A commission would serve as a reality check against a director’s impulses. It also would guard against rulings by one director frequently being overturned by a successor, thus adding to regulatory uncertainty. Moreover, it would reduce the likelihood that staffers will do the political bidding of the director. Ironically, Mrs. Warren herself originally envisioned a commission structure of governance. So did the Obama administration in its June 2009 draft proposal. Equally curious is that the language of H.R. 1121 is identical to that of Section 4103 of the House version (H.R. 4173) of the eventual Dodd-Frank law. Strange, but not too many House Democrats complained then. The reversal raises questions about the intent of the ostensible reformers.

Warren, now 61 and still the Leo Gottlieb Professor of Law at Harvard, has become a public figure of the top rank. A leading specialist in bankruptcy and commercial law, she was named by Time magazine as one of the 100 Most Influential People in the World in 2009 and 2010. In April 2010, a few months before final passage and signature of the Dodd-Frank bill, CNN reported that she was among the persons under consideration to replace retiring Justice John Paul Stevens on the Supreme Court. A frequent television guest, Warren is also the author of a number of best-selling books, especially with her daughter, Amelia Tyagi. While Warren hasn’t been nominated for permanent director of the Consumer Financial Protection Bureau, the job would appear to be hers for the asking. Her lack of expressed desire is a sign Obama is looking elsewhere. Whoever winds up in her seat, that person can expect scrutiny from members of Congress properly skeptical of the idea that government, and one person in particular within government, should supplant private-sector investment decisions.

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