Consumer Law & Policy Blog

Some Bad News Buried in the Dodd Financial Reform Bill?

The financial reform bill introduced by Sen. Chris Dodd on Monday would not create an independent Consumer Financial Protection Agency as does the financial reform bill passed earlier by the House of Representatives. Rather, Sen. Dodd's bill would create a new bureau within the Federal Reserve. Not to worry. We were told that this didn't matter much because the bureau would be truly independent of the Fed, with separate funding and its own rulemaking and enforcement authority.

Maybe not. Credit Slips has posted a short piece by University of Connecticut law professor Pat McCoy that explains that the Dodd bill includes an "obscure measure that would fatally hamstring the [Fed's] new 'Bureau of Consumer Financial Protection.'" What is it you ask? I'll let McCoy tell you:

Today’s bill, however, would gut both objectives [that is, consumer protection and the safety and soundness of the banking industry] by giving any federal banking regulator the unprecedented right to appeal consumer protection rules issued by the BCFP to a new Financial Stability Oversight Council, made up in part of – guess who? -- federal banking regulators. The Council could overturn any BCFP rule by a 2/3 vote[.] ... In effect, the bill hands a nuclear option to the same federal banking regulators who failed to protect consumers and the financial system during the housing bubble.

Yikes!

A Year and a Half After the Economy Crashes, and This Is What We Get?

by Robert Weissman

 A year and a half after the collapse of Lehman Brothers and Wall Street's subsequent implosion - and amidst the worst recession of the last 70 years - Congress has failed to adopt a financial reform package to rein in Wall Street and prevent a recurrence of the crisis. 

There is a single overriding reason for this state of affairs: Wall Street and the big banks continue to exert overwhelming and improper influence over the policymaking process.

That is one reason why breaking up the big banks is arguably the most important reform needed. We need to break up concentrations of financial power to rescue our democracy, diminish excessive risk-taking by large institutions that expect to be bailed out in case of failure, improve service for consumers and communities, and preserve financial stability.

Unfortunately, the new Senate proposal, like the already approved House bill, fails to meet this challenge.

Senate banking committee Chair Christopher Dodd’s new draft financial reform bill is the product of a drawn-out and apparently still ongoing negotiation. The bill is long and complicated, and it will take some time to digest all of its provisions. It contains some important positive reforms but also some gaps and areas of concern. 

On the contentious issue of the Consumer Financial Protection Agency -- downgraded to a Bureau of Consumer Financial Protection in the Dodd bill -- the story is mixed. Rather than being created as a standalone agency, the bureau is lodged at the Federal Reserve, an agency that utterly failed to exercise its consumer protection duties during the run-up to the financial crash. On the positive side for consumers, it does appear that the bill gives the bureau substantial autonomy, as well as rulemaking and enforcement power. Had a strong agency been in place at the turn of the century, the worst lending abuses that followed would have been avoided, and the financial crisis would have been noticeably less severe. 

The bill also gives the bureau authority to prohibit the practice of forced arbitration, in which companies force consumers to resolve disputes before private, secretive, company-chosen tribunals instead of public courts.

"Did a Lack of Consumer Protection Cause the Financial Crisis?"

Tomorrow at noon, the Cato Institute's Policy Forum will host what promises to be an interesting and lively  debate over that question, featuring Janis Bowdler, National Council of La Raza; Thomas Durkin, Former Economist, Federal Reserve Board; Ed Mierzwinski, U.S. PIRG; and Todd Zywicki, George Mason University School of Law. Moderated by Mark A. Calabria, Director, Financial Regulation Studies, Cato Institute.

Here's Cato's official description, which uses the term "consumer protection" in scare quotes:

There is likely no issue more contentious in the debate over the causes of the recent financial crisis and the appropriate response other than "consumer protection." The question of whether credit was too cheap or too expensive (or predatory) is at the heart of the differing narratives of the crisis. Panelists will examine these opposing narratives and debate the merits and substance of proposed consumer protections in our financial markets, including the creation of a Consumer Finance Product Agency.

If you can't make it over to Cato's Dupont Circle headquarters, you can watch it live online.

The Importance of CFPA Independence

In the Capitol Hill publication, The Hill. 

Senator Dodd's Bill

 The full text of the financial services reform bill introduced by Senator Dodd today, which includes a new Bureau of Consumer Financial Protection within the Federal Reserve, is available here.

At his press conference Senator Dodd seemed to emphasize that the Bureau will be independent of the Fed with a presidentially-appointed director and separate budget.

Unexpected Views on the CFPA

by Jeff Sovern

A couple of reports on the Consumer Financial Protection Agency proposal that go against type:

First. 19 current and former members of the Fed's Consumer Advisory Council, including our own Alan White, have joined in a letter supporting an independent CFPA and opposing housing it in any other federal agency, including the Fed. The letter states "No agency, including the Federal Reserve, has a strong record in this regard. * * * The Federal Reserve has its hands full with responsibilities relating to safety and soundness and monetary policy."

Second, Baseline Scenario is reporting on a finding of the March 2010 survey of members of the National Association for Business Economics:

A key point of discussion in Congressional deliberations on financial services regulatory reform has been the establishment of an independent agency focused on consumer financial protection. Fifty-four percent of survey respondents feel that creating such an agency would not impair safety and soundness regulation; 25 percent believed it would be detrimental.  On a related issue, 43 percent of respondents indicate that a consumer financial protection agency would not impair access to credit while 39 percent believed it would.

If business economists--who are not known for supporting consumer protection initiatives--are not persuaded by the arguments against the CFPA, why should anyone be?

Immergluck on Federal Preemption of State Antipredatory Lending Laws

by Jeff Sovern

I've been reading Dan Immergluck's fine book, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market (2009).  At pages 177-78, he has as good a description of the competition among regulators for lenders as I've seen:

 

[S]ome state regulators have a vested interest in preempting state consumer protection laws.  The ability to preempt state law is perhaps the greatest source of value in the federal thrift and national bank charters. Regulators can gain political power based on the number and size of the banks that fall under their regulatory supervision. In some cases, a regulator's operations are funded by levying fees on the institutions they regulate.  This can encourage an agency to pursue policies that are friendly to banks--especially larger ones. If a regulator does not use its ability to allow banks under its supervision to preempt state consumer protection regulations, the bank may change its charter so that it is regulated by a more lender-friendly agency.  . . . Even if an agency's funding is not directly tied to the banking assets under its supervision, if fewer and fewer institutions fall under its supervisory umbrella, its power and relevance will be called into question.  In the long run, this could jeopardize the agency's very existence.

* * *

In 1974, Arthur Burns, chairman of the Federal Reserve Board, expressed concerns over a "competition in laxity" among the regulators . . . . Since then, there have been repeated concerns that banks "forum shop" to find the most comfortable regulator . . . . Since at least the late 1990s, this "race for the bottom" includes regulators vying to offer banks as much preemption power as they can. Demonstrating the important of preemption to the value of a charter type, a banking attorney was quoted in the American Banker regarding the OCC's preemption actions as asking "Why would you want a national charter but for the preemption authority?" * * *

[After noting that the Office of Thrift Supervision (OTS) moved before the Office of the Comptroller of the Currency (OCC) to preempt state antipredatory lending laws, Immergluck continues:] The OCC was not about to let the thrift charter gain a clear regulatory advantage over the national bank charter. [Immergluck then describes the OCC's preemption efforts]

Perhaps this explains why the federal regulators have been so aggressive in preempting state laws. It's not just a matter of ideology or even generating fees; it's a matter of survival.  Another argument for the CFPA, which of course would not need to preempt state laws to survive.

Jeff Gelles Column on Why We Need an Independent CFPA

Here. Tellingly, Gelles describes how a troublesome credit card practice that elicited only an advisory letter from OCC, that as Gelles puts it, "told card issuers to do a better job of warning customers they could be shafted," was later outlawed by Congress in the Credit CARD Act, further demonstrating the gulf between Congress and existing bank regulators.

Do Safety and Soundness Justify Impairing the Independence of the CFPA?

by Jeff Sovern

The stated reason for housing the Consumer Financial Protection within the Department of the Treasury rather than operating it as an independent agency is the importance of safety and soundness regulation; the fear is that an independent CFPA might mandate conduct that would impair the safety and soundness of financial institutions.  Let me say first that safety and soundness regulation is important.  But having conceded that, I have several problems with the idea that safety and soundness concerns require the CFPA to be part of Treasury.

First, we have had safety and soundness regulations for longer than many of us have been alive.  Yet those rules did not prevent the financial crisis from occurring (or the savings and loan crisis, for that matter).  So safety and soundness regulations did not, in fact, produce safe and sound institutions.  Otherwise, Washington Mutual would still be with us, as would plenty of other institutions, and other lenders subject to safety and soundness regulations, like Citicorp, would not have needed a bailout.  The lesson here is that safety and soundness rules are not enough, by themselves, to produce safe and sound institutions.

Second, a pretty good argument can be made that if we had had adequate consumer protection, the loans on which consumers defaulted would never have been made, and we would not have had a financial crisis with its consequent bank closings and bailouts (my own attempt at that argument can be found here).  So consumer protection regulation contributes to safe and sound institutions.  Ironically, agencies ostensibly concerned with both safety and soundness and consumer protection, like the OCC, tilted too far towards safety and soundness, and not enough towards consumer protection, thereby producing less safe institutions.

Third, look who is arguing that the CFPA should be subordinated to safety and soundness concerns: banks--the entities that made the unsafe and unsound loans that brought down the economy.  So having done what they could to avoid safety and soundness rules--like using collateralized debt obligations to avoid reserve requirements, as detailed in Gillian Tett's book, Fool's Gold--banks have suddenly found religion.  How credible is the concern for safety and soundness from that source?  Could it be a pretext for opposing consumer protection legislation?

I would very much like to hear some examples of plausible consumer protection rules that an independent CFPA might actually adopt that would undermine the safety and soundness of financial institutions.  Because I'm not sure there are any.

Some Thoughts About the Dodd CFPA Compromise

by Jeff Sovern

Reports continue to emerge that Senator Dodd has proposed a compromise on the Consumer Financial Protection Agency.  Here. for example, is an excerpt from a Times report:

Rather than a stand-alone agency, Mr. Dodd proposed creating a Bureau of Financial Protection within the Treasury Department. The bureau would have an independent director, appointed by the president, and a budget financed by fees from large banks and other lenders.

* * *

 * * * [T]he Dodd proposal would require the bureau to consult with other regulators before issuing rules, and to make public any objections raised by those regulators, along with an explanation of how the bureau addressed the concerns or why it went ahead anyway.

The other regulators also could appeal the bureau’s proposed rules to a new interagency council, led by the Treasury secretary, whose job would be to detect risks to the financial system. The council could veto the rule or send it back to the bureau to be rewritten.

The proposal apparently would also reduce the agency's enforcement powers.  The article quotes consumer advocates as opposing the changes from the House bill.

My own view is that an independent agency would be far better than an agency housed within the Treasury Department.  The Treasury Department already houses the Office of the Comptroller of the Currency, an agency that has issued modest consumer protection rules, but that is more noteworthy for running roughshod over stronger consumer protection attempts by others. Thus, when states enacted predatory lending statutes, OCC declared them preempted.  Similarly, last summer the Supreme Court, in the Cuomo case, rejected the OCC's effort to prevent the New York State Attorney General's Office from investigating whether lenders had violated New York's credit discrimination laws. In short, the Treasury Department has not proved hospitable to consumer protection.

Why is that?  Look at the Treasury secretaries themselves. They are far more likely to have a background in banking than in consumer protection.  Treasury seems to be influenced far more by banking interests than consumer protection concerns.  The problem with housing a consumer protection agency within Treasury mirrors the problem of housing consumer protection efforts within the Federal Reserve. In both cases, consumer protection efforts tend to be subordinated to other priorities.  The result was the financial crisis.  Why would we want to repeat the mistakes of the past?

If anything, the structure of this proposal seems intended to emphasize that consumer protection is subordinate to other concerns.  The new interagency council would have the power to veto consumer protection rules.  That council would be headed by the Treasury Secretary.  So we have an agency within a department that has frustrated consumer protection efforts with a structure that gives others a veto over consumer protection efforts. 

Really, how much better is this than what we already have?  Better than nothing perhaps, but what we need is an agency that would have the inclination and ability to prevent the next financial crisis.  Would this new agency have that inclination?  Well, did the Treasury Department try to prevent the last one?