Reining in the CFPB

Diane Katz Contributor
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In a White House blog post on Monday, just hours before President Obama didn’t nominate her as director of the Consumer Financial Protection Bureau, Elizabeth Warren warned supporters that danger lurks for her regulatory paean to class warfare. “Make no mistake,” she wrote, “this agency still has enemies in Washington, D.C. And they have a plan.”

Golly, let’s hope so.

If by “enemy” the self-styled Oklahoma grandmother means citizens with misgivings about government micromanaging virtually every financial product and service, then, yes, there are more than a few of those. Tens of millions of them around the country, no doubt. And the plan, to the extent one exists, is simply to introduce to the bureau the very same checks and balances that apply to most every other regulatory agency in government — and upon which America was founded.

After all, this is a regulatory agency with unparalleled powers, including consolidated and expanded regulatory authority over credit and debit cards, mortgages, student loans, savings and checking accounts, and most every other consumer financial product and service. Essentially, all consumers’ money falls under bureau purview unless it’s under a mattress.

Fortunately, President Obama’s dithering over a director means the CFPB will mark its first anniversary today with fewer powers than Warren envisioned. Until a director is confirmed by the Senate, the CFPB is statutorily barred from imposing new regulations. That does not mean the bureau is impotent, however. With a battalion of bureaucrats at the ready, and a budget of $500 million, the CFPB is busily gathering intelligence on most every type of financial firm and preparing regulatory sorties under existing laws.

It is an opportune time, therefore, to remedy the bureau’s structural flaws. First and foremost, the CFPB budget should be controlled by Congress, not the Federal Reserve. Otherwise, its budgetary independence will undermine congressional oversight. Its status within the Fed also effectively prevents presidential supervision, while the Fed is statutorily prohibited from “intervening” in bureau affairs.

Bureau accountability also is minimized by the vague language of its statutory mandate. It is empowered to punish “unfair, deceptive and abusive” business practices. While “unfair” and “deceptive” have been defined in other regulatory contexts, the term “abusive” is largely undefined, granting the CFPB officials inordinate discretion.

Bureau proponents deny any lack of accountability, claiming the CFPB can be overruled by the Financial Stability Oversight Council, which is composed of representatives from eight other financial regulatory agencies. However, the council’s oversight authority is narrow, confined by statute to cases in which CFPB actions would endanger the “safety and soundness of the United States banking system or the stability of the financial system of the United States.” Any veto of bureau action would also require the approval of two-thirds of the council’s 10-member board.

Perhaps worst of all, none of this will prevent another financial crisis. If anything, the new agency, by placing new burdens on financial institutions and their customers, will actually increase risks to the financial system. At the same time, Fannie Mae and Freddie Mac — clear contributors to the financial crisis — fall outside the CFPB’s purview.

Nonetheless, the White House insists all this new regulation, along with $787 billion in “stimulus” funds, will revive the economy.

Meanwhile, the unemployment rate stands at 9.2 percent. The budget deficit tops $1.3 trillion, and federal debt has hit the ceiling at $14 trillion. Consumer spending is tepid, wages are stagnant and prices for energy and food are rising.

All of which makes creation of the CFPB supremely ironic. That is, its very existence is rooted in the lapses of seven other regulatory behemoths that were also supposed to protect us from financial calamity. And, its unparalleled powers, unless checked, will curtail the availability of credit and capital, both of which are sorely needed to nurture economic growth.

So, yes, there are indeed “enemies” of the policies that will not prevent another housing market meltdown but will hurt consumers and the economy by limiting financial products and services and raising the costs of those that survive. At the very least, Congress ought to impose a measure of accountability on the CFPB to ensure that the inevitable damage is contained.

Diane Katz is a research fellow in regulatory policy at The Heritage Foundation.