Thursday, August 28, 2014
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An authoritative rebuttal of CFPB myths

American Banker, a must-read for leaders in the financial sector, is telling them some inconvenient truths

An authoritative rebuttal of CFPB myths

I'm a great fan of American Banker, which epitomizes the ideal of an independent trade press. It's a must-read for leaders of the nation's financial sector, and it maintains that role by solid reporting without tending to pander to anyone's biases. Here are some highlights of today's AB piece "Four Big Myths About the CFPB and Its Powers" (the site itself is generally limited to subscribers), which debunks some of the persistent - and persistently misleading - complaints about the new Consumer Financial Protection Bureau:

Myth No. 1: The CFPB is the most powerful agency to ever exist.

In an interview with CNBC in March, Tom Donahue, the chief executive of the U.S. Chamber of Commerce, called the CFPB "the most powerful regulatory agency that's ever been put together." House Financial Services Committee Chairman Spencer Bachus and other top panel Republicans have all echoed similar claims.

So what are these new, sweeping powers the CFPB has? Well, for starters, most of the agency's authority is not new at all, 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.

Like other agencies, it has the power to hold hearings and subpoena witnesses and documents. It can also issue cease-and-desist orders and penalize individuals upward of $1 million 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.

One "new" power is a twist on an existing one bank regulators previously had. Before Dodd-Frank, the Federal Reserve Board could ban "unfair or deceptive" practices, a power the agency used only sparingly. But 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. By adding "abusive," the CFPB also may have additional leeway that other agencies did not.

Another provision of Dodd-Frank allows the CFPB to consider whether a bank has taken advantage of the consumer's reasonable reliance on the provider to watch out for the consumer's best interest. Some observers see that as significant new authority. "There is so much power in that statement … it's almost a carte blanche," said Jo Ann Barefoot, the co-director of Treliant Risk Advisors. "I definitely think that there's more power and latitude in the CFPB than most of the comparable agencies."

But the primary difference is the agency's focus. Instead of having other concerns, like safety and soundness, that might take priority over consumer issues, the CFPB is just worried about one thing: borrower protection. The real fear is not that the agency is much more powerful, but that unlike the bank regulators, it may use its authority.

Still, the bureau doesn't exactly have a blank check to do what it wants. Dodd-Frank includes some unique requirements that other banking regulators do not face, including that it must consider the potential costs and benefits of any new rule to both consumers and providers, and must consider the impact of proposed rules on community banks and smaller credit unions, and on consumers in rural areas. It's worth noting that it must, like other federal agencies, comply with the Administrative Procedures Act, which requires regulators to allow the public to comment on any rule before it is finalized. ...

Myth No. 2: CFPB has virtually unchecked authority.

Rep. Patrick McHenry, R-N.C., claimed last month that the CFPB will possess virtually unchecked discretion. Although observers said Republicans have legitimate concerns about the effectiveness of checks and balances for the CFPB, it's simply untrue to say that they don't exist.

Under Dodd-Frank, the Financial Stability Oversight Council can overturn the CFPB's rules by a two-thirds vote. Democrats, correctly, point out that no other regulator is subject to such an override, implying it is a significant check on the agency's authority.

But it's an open question whether the FSOC would ever really use such power. It requires a two-third vote by the council — with one of the 10 votes held by the director of the CFPB. While not an impossibly high bar — after all, the Senate meets the threshold on a regular basis — it is designed to make it hard to override the CFPB. ...

Myth No. 3: CFPB is not subject to congressional oversight.

Among the disparate claims about the CFPB is that the agency somehow does not have to answer to Congress.

While Republicans may be frustrated with what they see as misleading or evasive testimony from Elizabeth Warren, the bureau's de facto head, the fact that they can call her up to the Hill for a hearing — twice in a single month — is evidence of their oversight authority.

Under Dodd-Frank, the bureau is also required to submit annual financial reports to Congress, and report twice a year to justify its budget. ...

Unlike any other banking regulator, the CFPB will be subject to an audit by the Government Accountability Office, which will present its findings to Congress. Congress also has the power to overturn regulations through the Congressional Review Act.

Myth No. 4: CFPB has unparalleled budget authority.

At the heart of Republican arguments is that the CFPB is not on the appropriations process, unlike many other federal agencies, including the SEC, Consumer Product Safety Commission and FTC.

But as a banking regulator, the CFPB is hardly alone in being free of the congressional purse strings. Every other bank regulator — including the FDIC, OCC, Fed and Federal Housing Finance Agency — is funded by exam fees or other activities such as deposit insurance assessments. "The whole reason behind that was to try to make bank regulators independent," Clarke said. "Not that they're not accountable to anybody, but just that they're independent of the political process."

Unlike other bank regulators, however, the CFPB is not funded by exam fees but by a fellow regulator. Under Dodd-Frank, it can pull as much as 10% from the Fed's budget. While a large sum, it's important to note that it isn't, as some critics would claim, unlimited. For this year, the CFPB has a budget of $142.8 million, and has requested $329 million for fiscal 2012. ...

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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