Is GOP Push to Subject CFPB to Appropriations Hypocritical?

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WASHINGTON — When Congress debated a bill several years ago to create a new regulator for the government-sponsored enterprises, many parts were controversial, but nearly all lawmakers agreed that the agency should be independently funded and not subject to the appropriations process.

Yet some Republicans who supported that idea at the time are now backing plans to force a different financial regulator, the Consumer Financial Protection Bureau, to go to Congress for its funding.

Why the change of heart? Supporters argue the new agency has unprecedented power that needs to be checked, but others contend the GOP simply wants to undercut an agency it never liked to begin with.

"It's a political maneuver designed for Congress to limit the influence that the CFPB has," said Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin-Wallace College. "For members of Congress who didn't like it, this is a back-end way for them to make sure the CFPB is not particularly strong, and this is to make sure that they don't have the kind of funding they need to … do their job."

Rep. Barney Frank, the Massachusetts Democrat who helped create the CFPB in the regulatory reform law enacted last year, agreed.

"Efforts to put CFPB through the appropriations process are not born from a matter of principle, but just because they don't like the CFPB," he said in an interview Friday.

Frank said the change of position from the GSE debate to now was easy to explain: Republicans liked the Office of Federal Housing Enterprise Oversight, which regulated Fannie Mae and Freddie Mac until 2008 when it was replaced with an independently funded agency, and they don't like the CFPB.

"I haven't met a member of Congress who has any particular preference for whether an agency is directly funded or [funded] through the appropriations process," Frank said. "I think you've seen that with my Republican colleagues: many of them liked OFHEO, so they wanted it insulated, and they don't like CFPB, so they want to subject it to further controls."

For the record, Frank said that it is a perfectly legitimate reason to want to subject an agency to the appropriations process.

"What's hypocritical is to pretend that that's not really what's motivating you," he said.

Industry observers said OFHEO is a prime example of what can go wrong when politicians have control over a regulator's purse strings. Fannie and Freddie used their legions of lobbyists to limit the resources of the agency and, in turn, its effectiveness.

"The whole point of the appropriations process is that it provides many, many opportunities at different points for political considerations to enter into the process," said William Longbrake, an executive-in-residence at the University of Maryland and former vice chairman at Washington Mutual.

In 2003, Rep. Richard Baker, R-La., introduced a bill that would, among other things, remove the GSE regulator from the appropriations process in an effort to strengthen oversight. Among the Republican co-sponsors were Reps. Spencer Bachus, Jeb Hensarling, Donald Manzullo and Gary Miller.

The same group voted in favor of a similar measure — along with Reps. Randy Neugebauer and Patrick McHenry — when it came to the floor of the House in 2005.

But most of those lawmakers have supported calls by Bachus to subject the CFPB to the appropriations process.

Republicans argue that is not hypocritical, that the circumstances are completely different. While lawmakers were concerned that OFHEO had limited powers and was being weakened by the appropriations process, they claim the political influence is necessary to balance what they see as unprecedented power at the CFPB.

"OFHEO was dysfunctional because it had no power, but it always had to explain why it wasn't using the power it didn't have," said Wayne Abernathy, an executive director at the American Bankers Association, and a former Treasury assistant secretary during the Bush administration. "Our fear is that the bureau could become dysfunctional because it has enormous power and doesn't have to explain what it does to anybody."

Asked about the difference at a press conference last week, Bachus said other independent, self-funded agencies, such as the Securities and Exchange Commission, are also subject to the appropriations process.

"If you give me an example of an agency, I would [say] the independent agencies are not independent in their appropriations," he said. "Their appropriations come from Congress."

By contrast, the CFPB is funded by a percentage of the Federal Reserve Board's annual budget even though the central bank has no oversight of the consumer agency. Bachus cited the situation as another reason to subject the CFPB to appropriations.

"They don't have to state a case to the Federal Reserve," he said.

The rest of the banking regulators, however, are independent from the appropriations process. The Federal Deposit Insurance Corp. draws its money from the Deposit Insurance Fund, the Fed is funded by its open market activities and the Office of the Comptroller of the Currency and the Office of Thrift Supervision are funded by exam fees on the banks they oversee.

But Rep. Ed Royce, R-Calif., who introduced his own bill in 2003 to remove the GSE regulator from the appropriations process, said that, unlike OFHEO and the banking regulators, the CFPB has "no regard for safety and soundness."

"Since the idea of a CFPB came about, my fear has been that it will get into the business of allocating credit and dictating products," Royce, who also supports subjecting the CFPB to appropriations, said in a statement to American Banker. "Given their obscure funding mechanism, there is zero accountability to prevent such steps from being taken."

While OFHEO was a weak regulator with restricted powers, Royce said, "consumer protection regulation brings with it an army of activists that believe it is the government's role to dictate the allocation of credit. This is what we must combat."

But critics of the appropriations process say it is such activists — on both sides of the aisle — that can manipulate the appropriations process to cripple an agency.

Ellen Seidman, the former director of the OTS, said subjecting agencies to the appropriations process — even those agencies whose funding doesn't come from taxpayers — has led to a trend of declining budgets and limited powers.

"It's pretty clear that when a regulatory budget is subjected to appropriations, there is enormous pressure to rein in the budget," Seidman said.

Bert Ely, an independent analyst in Alexandria, Va., said the process can work as a control device in two ways: one is the amount of money that can be appropriated, and the other is the strings Congress can attach to the funding.

"We see this all the time in the appropriations process," Ely said. "We appropriate X billions of dollars to this agency, provided that not a single penny of it can be spent to do A, B or C. It can be a very effective way to … get the agency better focused on what elected politicians want to focus on."

Indeed, Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said the appropriations process acts like a "club in the closet" — lawmakers don't often have to take it out, its presence is influence enough on the agencies. But that's changing, Hurley said.

"A lot of the partisans are trying to use the club, not to achieve policy goals but achieving through the budget what they failed to achieve through the legislative process, and to me that's a perversion of the use of the power of the purse," Hurley said.

Still, some industry observers say there are legitimate causes for concerns about accountability.

Jaret Seiberg, an analyst with MF Global Inc.'s Washington Research Group, said the biggest driver behind efforts to subject the CFPB to the appropriations process is the idea that the head of the agency reports to no one.

"Washington likes checks and balances," Seiberg said. "And there are checks and balances built into the CFPB, but they're less obvious than the checks and balances that are built into the structures of the other agencies."

But other observers dismissed that argument as weak; they said that every agency — no matter how it is funded — answers to Congress and is influenced by lawmakers. For example, although the FDIC is not subject to the appropriations process, the agency instituted a moratorium that ultimately caused Wal-Mart Stores Inc. to withdraw its application to charter a bank after lawmakers from both parties raised concerns. The Fed, in turn, promulgated rules to rein in risky lending practices after lawmakers pushed the agency to act.

"You've got other very powerful regulators — the Fed immediately coming to mind — that are completely insulated from the appropriations process," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "Independence from the appropriations process means independence from day-to-day political control. It doesn't insulate the regulator from having to answer to Congress. I think this is a very political argument based on the degree to which you want to subject an entity to control."

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