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Never Mind CFPB – It's OCC and FHFA that Need Commissions

Republicans want to replace Rich Cordray by a board or commission to govern the CFPB, similarly to the FDIC. Now some propose doing the same for the OCC also.

Good idea. Both the OCC and the FHFA should be run by boards, to gain a benefit that Republican proponents haven't mentioned and probably wouldn't want: to reduce the demonstrated propensity for regulatory capture of these agencies by the megabanks.

Let's start with that fearless public servant, Ed DeMarco, who now heads the FHFA, which is responsible for Fannie and Freddie under their conservatorships—an immense job.

Look at three of his most conspicuous decisions:

First, with astute recourse to repeated delays, he has stoutly resisted pressure from the President and some members of Congress to reduce the principal balance on underwater mortgages.

Second, he took some concrete steps to wind down Fannie and Freddie, for instance by converging their securitization programs toward a single structure. He also keeps saying their future should be brief.

Third, he recently stopped Fannie's program aimed at reducing the cost it and borrowers incur as a result of force-placed insurance arranged by servicers on mortgaged properties.

I happen to agree with the first two. I consider the third to be utterly indefensible, anti-consumer, harmful to taxpayers—and comprehensible only as surrender to special interests.

But that's not the point. All three of these decisions have the same slant. They all align with what the megabanks (or megaservicers) want.

These institutions want to go on "earning" commissions or profit shares from sticking mortgage borrowers with overpriced and even retroactive force-placed insurance. (Let's all buy retroactive insurance, "insuring" our losses only after they occur!)

Such income is extortionate, and places servicers in unnecessary and untenable conflict with borrowers and the owners of mortgage securities. It makes about as much sense as giving servicers a cut of the real estate commissions when they sell foreclosed properties.

The megabanks want to reduce government mortgage involvement because the GSEs cut originator spreads on conforming mortgage production to a sliver—while the private market paid much better. So, they push to reinvigorate private mortgage securities issuance.

And of course they don't want to reduce principal on underwater mortgages—that would cost them big money.

So, I claim that Ed DeMarco has been captured by "the industry." Not, in the case of force-placed insurance, by a couple of midsized insurance companies of negligible political clout. In all three instances, he's been captured by the megabanks, which are the leading servicers.

The FDIC and the Fed, both run by boards, seemingly have been far more evenhanded. (There are exceptions. In the case of Durbin the Fed was swayed by the big banks—and some outrageously stupid small banks—to roughly double the interchange ceiling it had first proposed.)

But, you'd have to search long and hard to find very many members of the FDIC and Fed boards who became conspicuously wealthy after their board service through fees paid by institutions they previously regulated. Can you imagine Sheila Bair or Ben Bernanke doing that?

It's been different for former Comptrollers of the Currency.

If you have immense personal power over regulation of big banks, then you're likely to start seeing things their way. And they in return are likely to consider you a very valuable person, with a glow that lingers after you leave office. (Even in the same league as former Secretary of the Treasury Robert Rubin, paid over $100 million while exacerbating the collapse of Citi after departing Washington.)

Then, how about the original target of the purported reform efforts, Rich Cordray and the CFPB? I won't stretch your imagination about what Rich could do after his service as Governor of Ohio (2014)—his longtime ambition. My hope would be law school professor, but I'd settle for Senator—better than Sherrod Brown, or Elizabeth Warren. It's hard to imagine him, or any director of the CFPB, getting fat on bank consulting fees.  

Bring down the curtain on this silly sideshow about replacing Cordray by a board. That would make no difference, because he's not the pet of the megabanks, or of anyone else. Let's have Congress create boards for FHFA, given its unlimited life expectancy, and OCC. That would make a difference, reducing the undue influence of the megabanks. While we're at it, let's put current FHA lending programs under FHFA so that there's finally hope of coherent, coordinated oversight of federal mortgage activity.

Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was for six years the founding CEO of First Deposit, later known as Providian.


(4) Comments



Comments (4)
Yes, the Commission is less subject to regulatory capture than a government body reporting to one person (e.g., a department).

The price is accountability. When you vote for mayor, county executive, governor, and president, you expect him or her, if elected, to carry out the program he campaigned on by appointing department heads with the appropriate instructions. And firing them if they fail to carry our that program. The commission attenuates that accountability.
Posted by dweinkrant | Tuesday, February 26 2013 at 8:23PM ET
@dweinkrant. No doubt, but this misses the point. Commissions might, as a whole, be less subject to capture precisely because the diversity of commissioners offers a chance--not a guarantee--of competing views, even if each of the commissioners is "captured" in some way by a different interest group.
Posted by Lawrence Baxter | Tuesday, February 26 2013 at 8:37AM ET
I recall Wendy Lee Gramm being a commissioner of the Commodity Futures Trading Commission from 1988 to 1993, during which time it exempted trading of energy derivatives from regulation. Trading of energy derivatives was central to the business of Enron Corporation. In 1993 Gramm resigned from the CFTC and took a seat on the Enron Board of Directors and served on its Audit Committee. While on the board of directors she received donations from Enron to support the Mercatus Center. Meanwhile, her husband was a U.S. senator and second largest receipient of campaign contributions from Enron Corporation. Senator Gramm favored energy deregulation.

I think commissions like other forms of government are subject to regulatory capture.
Posted by dweinkrant | Monday, February 25 2013 at 10:25PM ET
At first glance the proposals to create boards appeared to be yet another tactic for paralyzing regulation (look at how ridiculous Congress has been at confirming presidential nominations. However, Andrew Kahr's reasoning is the most thoughtful on the subject so far. The influence of the industry threatens to overwhelm government and the record of the individual directors seems to support this charge. Having pluralistic boards might well be the only protection we can develop for promoting a genuine sense of the public interest. Yet a danger is that this approach would also create another opportunity for judicial challenge, with antagonists who would rather have no regulation at all and who seem to think everything can be put up for grabs nowadays, arguing that independent agencies are unconstitutional.
Posted by Lawrence Baxter | Monday, February 25 2013 at 11:31AM ET
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