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Don’t Let Banking Industry Capture the CFPB

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The Obama administration and Congressional Democrats scored a significant victory last year in passing legislation to create the Consumer Financial Protection Bureau. Yet the bureau can’t fully protect consumers fully until it has a director.

The president has nominated former Ohio Attorney General Richard Cordray to head the bureau, and he was approved by the Senate Banking Committee, but the nomination is stuck in the full chamber. Forty-four Senate Republicans have vowed to block the nomination until the bureau’s structure is changed to a commission, among other changes. The House has already passed a bill to convert the bureau to a commission.

Many other agencies are led by commissions, including the Federal Trade Commission and the Consumer Product Safety Commission, both of which protect consumers; Elizabeth Warren, the architect of the CFPB, specifically mentioned the latter as a model in her 2007 article proposing the creation of a “Financial Product Safety Commission.” So the Republican proposal appears reasonable, making its opponents look like they are caught up in some Washington version of inside baseball, sacrificing consumer protection over dull governance issues. Nothing could be further from the truth. The way the House bill would structure the commission risks at worst handing the bureau over to financial institutions and at best producing a partisan deadlock. 

Why would a simple commission effect such a change? Because of its composition. First, the House bill would make one commissioner an official from the Federal Reserve. The Federal Reserve has shown little interest in protecting consumers; for example, though Congress gave the Fed powers in 1994 it could have used to bar predatory mortgage lending, the Fed disdained using the powers until 2008, too late to stop the Great Recession. Mindful of this history, last year’s Congress resisted calls to make the bureau subject to the Fed’s leadership. Republican proposals to give the Fed power over the bureau thus seem like attempts to restrain consumer protection.

Second, no more than two of the remaining four can be Democrats. And remember those 44 Senators: if the bureau becomes a commission, it is easy to imagine the Senators imposing conditions on approval of commissioners. For example, they may insist that two of the commissioners represent the financial industry. It is a short step from refusing to confirm Nobel laureate Peter Diamond to the Fed’s Board to declining to nominate CFPB commissioners who lack a particular perspective. Two such commissioners, together with the Fed official, could form a majority of the bureau’s five commissioners to protect banks from consumers, rather than consumers from banks.

Even if financial institutions fail to capture the bureau, the commission model could easily reduce its effectiveness. A commission setup increases the likelihood of deadlocked voting, with the result that consumer protection measures are not adopted. For example, when a seat falls vacant, if the remaining four commissioners are split among consumer and financial institution interests, a determined Senate minority could imitate the 44 Senators and decline to confirm a fifth commissioner to break the deadlock. Alternatively, if Republicans can keep the directorship vacant until the presidential election and then defeat Obama, perhaps their opposition to a director will melt away.  

These scenarios are not fanciful. Financial institutions have a long and often successful history of fighting attempts to regulate them by capturing regulatory agencies so that instead of retarding banks’ interests the agencies protect them. Besides the Fed, another example is the Office of the Comptroller of the Currency.  When states enacted laws to prevent predatory lending in the years before the Great Recession hit, the OCC, then led by former bank lobbyist John Dugan, blocked application of the state laws to national banks.  

Why are Republican legislators so unsupportive of consumer protection? It’s hard to know whether the answer is ideological or self-interest. Those who oppose regulation generally can be expected to oppose regulation of financial institutions. Thus, House Financial Services Committee Chairman Spencer Bachus has said that Washington and regulators exist to serve banks. And helping banks builds campaign coffers. For example, according to the Center for Responsive Politics, during the current election cycle, the finance, insurance, and real estate sector has donated $2.3 million—nearly four times as much as any other sector—to Senator Richard Shelby, a leader of the 44 Republican Senators and the ranking member of the Senate Banking Committee.

In short, changing the bureau to a commission could end up with the illusion of a consumer protection agency that will help prevent the next Great Recession, but not the reality. Perhaps we should update the old adage: if you can’t beat ‘em, capture ‘em or stalemate ‘em.

Jeff Sovern is a Professor of Law at St. John’s University in New York.

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