Takeover Bid for an Agency Banking Can't Stand
Last week, we discussed several developments that have the banking industry up in arms. Each of these trace back to Democratic Senator Elizabeth Warren.
The first was the new mortgage disclosure rules from the Consumer Financial Protection Bureau. The regulations consolidate several documents, mandate greater transparency in simpler language and require a three-day disclosure before a real-estate closing. The industry is none too happy about this.
A related issue came about when one of the hired guns at a Washington think tank got caught violating internal rules on conflicts of interest. Both the analyst and think tank were hired to oppose new Labor Department fiduciary rules covering retirement-saving accounts. The conflict revealed the difficulty in serving two masters.
Which brings us to the latest battle in the never-ending war between finance and regulation: The attempt to neuter the CFPB.
The banking industry has been vehemently opposed to the CFPB from the beginning. The agency was the brainchild of Warren, who was then a Harvard Law School professor. The industry fought the legislation that established the agency (it failed) and was opposed to Warren serving as its first head (it succeeded).
That effort turned out to be an epic miscalculation. Warren ran for, and won, the seat in the U. S. Senate that Edward Kennedy once held. Freed from the daily grind of running an agency, she has become the Obi-Wan Kenobi of banking industry critics: Temporarily stopping her made her an even more powerful lawmaker and industry gadfly. Operating from a base in the liberal state of Massachusetts, Warren is sometimes mentioned as a potential presidential candidate, polling at the top of many Democrats' wish lists.
In hindsight, the banking industry would have been better off letting her run the CFPB.
Which leads us to HR 1266. It is a clever attempt to hobble the agency by giving oversight to a five-member board. An assortment of various trade groups representing banks and financial-services companies sent a letter last week to Jeb Hensarling and Maxine Waters, the chairman and ranking member, respectively, of the House Financial Services Committee. According to the letter:
A commission would serve as a source of balance and stability for consumers and the financial services industry by encouraging internal debate and deliberation, ultimately leading to increased transparency. Moreover, a commission would further promote the CFPB's ability to make bipartisan and reasoned judgments to ensure consumers receive the protection they deserve, which in turn would help strengthen the economy; and would avoid the risk of politically motivated decisions causing uncertainty and harm to consumers.
The authors of the letter mean nothing of the sort, of course. The goal of the oversight commission is to tie up the CFPB so it is unable to do anything. The financial industry couldn't stop the creation of the CFPB, the thinking goes, so let's ensnare it in as much partisan and bureaucratic gridlock as possible.
As an example of how this would work, consider the aforementioned fiduciary rules. The Securities and Exchange Commission has determined that this standard should be the uniform duty of care owed to clients by anyone working in finance. A specially commissioned research report that was required by the Dodd-Frank Act independently reached that conclusion, as has the SEC's staff, and a number of professional and academic experts. Yet politically, it has been a nonstarter. The reason? After a fierce and relentless lobbying blitz by the industry, the SEC can't seem to get the backing of three of its five commissioners.
The Labor Department, on the other hand, is a cabinet-level agency that can issue regulations by design, without a partisan fracas. Hence, the department (which regulates pensions and retirement plans) was able to mandate that 401(k) providers be held to a fiduciary standard, something the SEC has been unable to require of the rest of the financial industry.
Back to the CFPB. Dodd-Frank created the commission, led by a single director, with oversight provided by the Financial Stability Oversight Council, a board made up of the heads of the various federal departments and agencies that regulate the financial industry. The banking industry's strategy here is regulatory capture. A five-member commission -- appointed by the president and confirmed by the Senate -- would snarl the agency in red tape and partisan bickering, just as it has at the SEC. Rule-making by the CFPB would be the victim. Note that Congress considered the idea of creating a five-member oversight commission at the time the CFPB was established, but decided not to go that route.
It's obvious that this proposed legislation is simply an effort to hamstring an agency the industry failed to kill from the start. What the industry probably doesn't realize is that this campaign may do nothing more than strengthen the hand of its leading adversary, Elizabeth Warren.
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