— Almost a year after Congress created a new federal agency to protect consumers from shady lending practices, there is a move afoot on Capitol Hill to clip its wings before it takes flight.
The Consumer Financial Protection Bureau was one of the most contentious provisions of the sweeping Dodd-Frank financial reform bill enacted in 2010. That 2,000-page legislation was designed to fix many of the regulatory loopholes that allowed big banks to take on too much risk. The aim was to prevent another financial collapse like the Panic of 2008 that produced a massive government bailout, sent the housing market into a tailspin and plunged the economy into a deep recession.
On Wednesday, the CFPB put its toe in the turbulent waters of regulating mortgage loan disclosures, one of the most common consumer credit complaints during the housing boom. The "Know Before You Owe" project will test two prototype forms designed to clearly spell out loan terms when a borrower applies for a mortgage. Over the next few months, the CFPB will test the new forms with consumers, lenders and mortgage brokers and take comments on its
"With a clear, simple form, consumers can better answer two basic questions: 'Can I afford this mortgage, and can I get a better deal somewhere else?'" Elizabeth Warren, the White House's special adviser in charge of setting up the CFPB, told reporters.
When it officially opens for business in July, the new, independent consumer lending watchdog will consolidate regulatory powers now housed in seven different federal agencies with a mandate to protect individuals from abusive lending practices by the financial services industry.
Much of the criticism of the CFPB has been aimed at the appointment of Warren, a Harvard law professor who has been a tireless critic of the financial services industry — one of the most powerful lobbies in Washington.
To avoid a battle in the Senate to confirm her as the agency's new director, President Barack Obama appointed her in September as a special assistant to Treasury Secretary Tim Geithner. In that role, she is in charge of staffing up the new bureau, putting systems and procedures in place, creating new rules and developing ways to tighten enforcement of existing rules against predatory lending.
With just two months to go before the law officially grants the agency those powers, Congress is considering measures that supporters of the new agency say would substantially weaken it before it writes its first new rule.
Last week, the House Financial Services Committee passed three bills to tighten the reins on the agency. One would create a new bipartisan commission to oversee it. A second would make it easier for other regulators to veto any new rules written by the CFPB. And a third would give it independent status only if its director is confirmed by the Senate, where Republicans are also demanding changes in oversight of the agency
"No person should have the unfettered authority presently granted to the director of the Consumer Financial Protection Bureau," forty-four GOP senators wrote to Obama earlier this month. "Therefore we believe that the Senate should not consider any nominee to be CFPB director until the CFPB is properly reformed."
Senate Republicans also are pressing for a commission to oversee the agency, along with congressional approval of its budget and greater veto power by banking regulators over any CFPB decisions.
Warren declined a request for an interview. But in a statement, she said the moves are designed to "defund, delay and defang the consumer agency before it can help one family."
"These bills are about preventing the CFPB from operating effectively — a dangerous game to play in light of recent lessons in the marketplace and how quickly financial threats to consumers emerge,” she said.
In the months since her appointment, Warren has been setting up the bureau's organizational structure, hiring a staff of about 200 that includes veteran regulators and lending industry experts and reviewing existing regulations and proposals for new ones. She's also been on something of a charm offensive, meeting with bankers, business leaders and members of Congress.
"Everyone seems to report back the same thing: She's a very engaging and engaged person," said Jess Sharp, executive director of the U.S. Chamber of Commerce's Center for Capital Markets.
But as the July 21 deadline approaches for naming a director, the battle over the agency's oversight and Warren's appointment threatens to delay the bureau's start-up. Until a director is officially named, some 18 statutes covering various forms of consumer lending will remain housed in the seven regulatory agencies that currently oversee everything from mortgages to student loans.
"We don’t have a moment to waste on these issues," said David Berenbaum, chief program officer for the National Community Reinvestment Coalition. "Consumers are having difficulty accessing credit around the country today. We need simplicity accessing mortgage credit for consumers. And we need to insure they're sustainable and appropriately underwritten."
Senate Republicans have enough votes to block any nominee to head the agency. One option would be for the White House to appoint a temporary director when Congress in in recess — without Senate approval. Alabama's Richard Shelby, the ranking Republican on the Senate Banking Committee, has already warned that such a move would "silence the people's voice."
Though the CFPB will oversee financial products that are most familiar to consumers — from credit cards to mortgages to payday loans — it is just one piece of the much larger financial Dodd-Frank reform package. Hailed at the time as the biggest overhaul in financial regulation since the New Deal, the law left it to existing regulators to write the details of hundreds of new rules called for in the package.
Proponents of the CFPB's independence have argued that those regulators didn't need Dodd-Frank to prevent the excesses that led to the mortgage lending spree that helped produce the financial crisis.
"Over the past three years all of these regulators have realized they need to intervene — the Federal Reserve, the Office of the Controller of the Currency — all are taking a more active role," said Berenbaum. "But where were they over the past decade, when many institutions, both consumer and trade institutions, were warning about issues of safety and soundness?"
By leaving the details of the rulemaking process to those same regulators, Dodd-Frank sidestepped some of the most contentious battles over where and how to rein in big banks. Some observers think the battle over the CFPB is just the tip of a larger political battle yet to be fought over that wider effort at financial regulatory reform.
"The consumer piece is all tangled up in politics," said Cornelius Hurley, a professor of banking law at Boston University. "The systemic risk piece is all tangled up in their inability to get their minds around what a 'systemically significant enterprise' is. And you have the Republicans trying to repeal large chunks of it and browbeat the regulators in to slow-walking large chunks of it backwards. It's a mess."