by Jeff Sovern
H.R. 1315, the so-called Consumer Financial Protection Safety and Soundness Improvement Act passed by the House last week displays an extraordinary number of seemingly neutral "improvements" that would collectively have the effect of crippling the Consumer Financial Protection Bureau, or even tipping it over to an agency that would be more protective of banks than consumers. Unfortunately, because of the complexity of the issues, explaining all that briefly in a way that can be easily understood is not easy. That's probably the point. The bill is diabolically clever.
Let's start with the commissioners. Of the five commissioners, one has to be the Vice Chairman for Supervision of the Federal Reserve System. That would be the same Fed that Congress gave the power to prevent predatory lending to in 1994 that the Fed didn't use until 2008, far too late to prevent the subprime fiasco. It would also be the same Fed that sometimes seems unduly influenced by the banks it regulates. So let's count that commissioner as a vote against consumer protection. No more than two of the remaining four commissioners can be members of the same political party. If the president appoints two Democrats and two Republicans, say, that leaves us with a majority of the commissioners who are either Republicans or who work for the Fed. Of course, it doesn't have to work that way. The president could appoint independents instead of Republicans. But remember also that the Commissioners have to get through the Senate. It's easy to imagine the same 44 Senators who have opposed any nominee for director saying they will oppose nominees for the Commission unless two are Republicans. So instead of a director who will protect consumers, we end up with a significant chance of an agency that protects banks, even with a democratic president. You can also imagine combinations that end up replicating the same kind of partisan gridlock we have in Congress already. For example, suppose we have four commissioners seated, split between pro-consumer and pro-bank factions, and the Senate refuses to confirm a fifth commissioner who would break the tie. See how clever this is?
But that is far from all. The bill also provides for staggered terms, so that in four out of every five years, a term ends and the president gets to nominate a new commissioner. If President Obama loses in 2012, that will give the new president a nomination fairly quickly. The president also gets to name the chair of the Commission, so once that nominee is confirmed, the president could designate that person the chair. And voila: a Bureau that is supposed to protect consumers instead protects banks.
But, of course, President Obama could win re-election. Perhaps the Bureau, despite the restraints described above, will propose a regulation to protect consumers that would reduce financial institution profits. Banks still may avoid worry because the Financial Stability Oversight Council could overrule the regulations Current law says such overruling requires a two-thirds majority, but the House bill would reduce that to a simple majority and take away the Bureau's vote. Remember that the FSOC includes several bank regulators, including the Comptroller of the Currency, an agency that the banks essentially own. The House bill also lowers the standard for the FSOC to overrule the Bureau by requiring it to overturn (currently, it's discretionary) Bureau regulations which are "inconsistent with the safe and sound operations of United States financial institutions" (currently the standard is that it would put safety and soundness at risk). So suppose the Bureau proposes a regulation which would have the effect of reducing bank profits. Would that be inconsistent with the safety and soundness of banks? If so, no matter how wonderful the regulation, the FSOC would have to reject it.
There's more. Before adopting new regulations the Bureau has to conduct not one but two new analyses. That can slow things down.
I have a feeling I haven't even found everything that would affect the Bureau's functioning. As I say, it's diabolical.