The Financial Services Industry's Misguided Quest to Undermine the Consumer Financial Protection Bureau
Arthur E. Wilmarth Jr.
George Washington University Law School
January 9, 2012
Review of Banking and Financial Law, Vol. 31, No. 2, Spring 2012
GWU Legal Studies Research Paper No. 2012-4
GWU Law School Public Law Research Paper No. 2012-4
Congress decided to establish the Consumer Financial Protection Bureau (“CFPB”) after concluding that federal bank regulators had utterly failed to protect consumers during the credit boom leading up to the financial crisis. Because of the prudential regulators’ systemic failures, Congress vested CFPB with sole responsibility and clear accountability for protecting consumers of financial services. Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act delegates broad rulemaking and enforcement powers to CFPB. To insulate CFPB from political influence, Title X grants CFPB substantial autonomy as well as an assured source of funding from the Federal Reserve System.
The financial services industry and most Republican members of Congress vehemently opposed CFPB’s creation, and they have sought to prevent CFPB from implementing its mandate under Title X. In July 2011, the Republican-controlled House of Representatives passed legislation that would seriously undermine CFPB’s autonomy and effectiveness by (i) changing CFPB’s leadership structure from a single Director to a five-member commission, (ii) giving federal prudential regulators a greatly enhanced veto power over CFPB’s rules, and (iii) giving Congress complete control over CFPB’s funding. Republican Senators declared that they would block confirmation of any CFPB Director until Congress approves legislation making the same three changes. Without a Director, CFPB cannot effectively regulate nondepository providers of financial services or exercise many of the powers delegated to the bureau by Title X.
The financial services industry and Republican leaders have justified their campaign against CFPB by claiming that the bureau has unprecedented authority as well as a unique structure that is unaccountable to the political branches. In fact, CFPB’s structure and powers closely resemble those of other federal financial regulators, including the Federal Housing Finance Agency (“FHFA”) and the Office of the Comptroller of the Currency (“OCC”). Major banks and their legislative supporters strongly supported the creation of FHFA as a means of controlling Fannie Mae and Freddie Mac, and they emphasized FHFA’s need for sweeping powers and independent funding that could not be undermined by Fannie’s and Freddie’s political allies. Similarly, large banks and Republican leaders have vigorously defended OCC’s independent authority to act on behalf of its regulated constituents (i.e., national banks). Thus, it seems clear that the financial services industry and its political supporters oppose CFPB because of its statutory mission, not its structure.
Large financial firms evidently fear that they cannot exercise the same degree of political influence over CFPB as they have successfully deployed in the past with regard to prudential regulators. In the financial industry’s view, CFPB is likely to act independently and conscientiously in carrying out its mandate to protect consumers from predatory financial practices. Congress should want that result. The financial crisis has shown convincingly that a systematic failure to protect consumers will eventually threaten the stability of our financial system as well as our general economy. Congress should therefore preserve CFPB’s existing authority and autonomy despite the determined attacks of the financial services industry and its Republican allies.
Number of Pages in PDF File: 76
Keywords: Consumer Financial Protection Bureau, administrative agency design, financial services industry, political influence, regulatory capture
JEL Classification: E58, G18, G20, G21, G28, K23
Date posted: January 10, 2012 ; Last revised: January 28, 2013