The massive new
regulatory agency charged with serving as a watchdog over broad
swaths of the US financial services industry has not yet opened its
doors, has no permanent head in place and has still to articulate
any vision beyond evangelising about the need for change. Charles
Davis reports.
Go deeper with GlobalData
The make-up
of the US Consumer Financial Protection Bureau (CFPB) portfolio is
shaping up to be the nation’s next titanic political battle. Banks
and their Republican supporters will be pitted against Democrats
intent on positioning themselves as consumer protectors.
The new government agency,
created in the wake of the financial crisis, has the power to hold
hearings and subpoena witnesses and documents.
It can also issue
cease-and-desist orders and penalise individuals upward of $1m for
each day they are in violation of a consumer law. It is the only
bank regulator that can take a bank directly to court on any
fair-lending matter, rather than having to go through the Justice
Department.
The CFPB has the power to
define ‘unfair, deceptive or abusive’ practices in connection with
consumer products. Unlike the Fed, the new agency is expected to be
much more proactive in pursuing practices it deems are
inappropriate.
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By GlobalDataThe biggest difference may be
the simple fact that the CFPB will be singularly focused on
consumer protection, rather than managing risk or capital ratios.
That alone is enough to keep bankers awake at night.
But lawmakers are still
squaring off over how the agency should be run and how much power
it should have.
With the agency a fait
accompli, political firepower is now trained on Harvard
professor Elizabeth Warren, a special adviser to the president
charged with setting up the agency.
The Obama administration
would ideally nominate Warren to run it permanently, but Warren’s
nomination has been stymied by political opposition, both from
Republicans and within the more conservative wing of the Democratic
Party.
A long-time, high-profile
defender of consumer rights, Warren is a lightning rod and has
emboldened opponents of the CFPB who sense a chance to rein in the
agency before it even opens.
Forty-four Senate Republicans
recently signed a letter saying they would not confirm any nominee
for head of the CFPB – not just Warren – unless several major
changes are put into place.
Democrats fired back with a
letter signed by 89 House lawmakers urging the president to bypass
the Senate confirmation process and to name the Harvard law
professor as an appointment during the next Senate
recess.
“If Republicans in the Senate
refuse to consider her, we request you use your constitutional
authority to make her a recess appointment,” reads the letter from
the Democrats.
The letter comes after the
Senate blocked the traditional Memorial Day recess by keeping the
Senate in pro forma session-just to block Warren’s
appointment. The lawmakers also showed a petition supporting Warren
with 250,000 signatures gathered by liberal groups Progressive
Change Campaign Committee and CREDO Action.
If Warren were appointed
during a Senate recess, she could serve in the job only until the
end of 2012, rather than the five-year term specified in last
year’s Wall Street reform bill.
Created by the 2010
Dodd-Frank Wall Street Reform and Consumer Protection Act, the
CFPB’s operating statute instructs the new agency to institute a
host of new regulations, including: requiring mortgage lenders to
determine that a borrower has the ability to repay a loan by
verifying income and making sure borrowers can afford loans even
after teaser rates expire and payments rise; and prohibit
prepayment penalties, which can make it expensive to refinance, for
high-cost loans and adjustable-rate mortgages.
The regulation also puts an
end to paying bonuses to mortgage brokers and loan officers who
steer borrowers into higher-cost loans than they otherwise qualify
for; and requires clearer and simpler disclosures about
international money transfers, among others.
Republicans are employing a
variety of legislative tactics aimed at undoing the agency. House
members introduced a bill in March to replace the director with a
five-person commission having members from both parties.
Other regulatory agencies,
including the Fed itself, the Federal Deposit Insurance, Securities
and Exchange Commission, Federal Trade Commission and Consumer
Product Safety Commission, are run by a commission or board, whose
members are Democrats and Republicans.
The House also voted to cut
the bureau’s budget from $143m to $80m, but that measure is little
more than a speed bump, as the cuts will never make it out of the
Senate.
The American Bankers
Association predicts the Dodd-Frank Act, which created the CFPB,
will help drive more than 1,000 banks out of business by the end of
2020.
The United States Chamber of
Commerce went a step further, declaring the CFPB the “most sweeping
government agency ever created”.
Neither claim is
substantiated by the facts. Most of the agency’s authority is not
new, but transferred from other federal agencies.
That includes enforcement of
dozens of different consumer financial rules, such as the Home
Ownership and Equity Protection Act and Home Mortgage Disclosure
Act.
While there remains a significant gap in sentiment, data
from the BAI/Finacle Index of customer sentiment shows bankers are
drawing closer to consumers’ view on lenders (see graph,
above ).
