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.