WASHINGTON — In this political environment, it was always going to be a challenge for bankers to win much-sought structural reforms to the Consumer Financial Protection Bureau.
But the revelation that thousands of Wells Fargo employees committed what amounted to bank fraud just put the final nail in the coffin for the effort — at least for the foreseeable future.
Democrats on Tuesday wasted no time arguing that the $190 million that Wells paid in fines and restitution clinched the case against reforming the bureau.
"We need to look no further than just last week to see why we need a strong Consumer Financial Protection Bureau, which used its authorities under Dodd-Frank to uncover a massive scheme under which millions of consumer accounts at Wells Fargo were fraudulently opened, with the bulk of this fraud perpetrated in my hometown of Los Angeles," said Rep. Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee.
Waters and other Democrats on the committee used the enforcement action as a reason to oppose Chairman Jeb Hensarling's comprehensive regulatory relief bill, called the Financial Choice Act, which includes provisions that would replace the CFPB's director with a five-member commission and subject the agency to the congressional appropriations process.
Another provision would remove the CFPB's ability to target "abusive" practices, a new standard that was added in the Dodd-Frank Act. (Regulators could previously just seek out "deceptive" or "unfair" practices, though the difference between those terms and "abusive" are unclear.)
"The bill would completely gut the Consumer Financial Protection Bureau, which has been an effective watchdog of consumers," said Rep. Carolyn Maloney, D-N.Y. "I am particularly disturbed that this bill would take away the Consumer Financial Protection Bureau's ability to penalize companies for practices that are abusive to consumer such as the practices of Wells Fargo."
Banking industry representatives always knew the CFPB provisions would be tough to enact, particularly in the Senate, where the CFPB's founder, Sen. Elizabeth Warren, D-Mass., holds substantial influence. But they had been growing hopeful that at least a few could pass.
That now appears highly unlikely, however, according to industry representatives.
"Much-needed CFPB reform is basically DOA," said Camden Fine, the president of the Independent Community Bankers of America. "Wells' greed has made it much more difficult for ICBA to get much-needed regulatory relief."
Analysts agreed with that assessment.
"Forget about substantially curbing the CFPB's powers," wrote Jaret Seiberg, an analyst with Cowen Washington Research Group. "Not that Sen. Elizabeth Warren needed more ammunition to protect the CFPB, but she has it now."
She was quick to use it. In a fundraising email to her thousands of supporters on Tuesday, Warren cited the Wells case in calling on them to help oppose the bills in Congress to restructure the agency.
"Wells Fargo proved that giant banks still think the rules don't apply to them. Nope. They think they can cheat their customers, stuff their pockets with money, and still walk away," the Massachusetts Democrat wrote. "The Wells Fargo case is one more reason we need to fight for a strong Consumer Financial Protection Bureau. The big banks and financial institutions hate the CFPB, and they have bills pending in the House and Senate to get rid of it. The Republican Party's 2016 platform calls for the CFPB to be 'abolished.' The only way to stop the right-wing attacks on the consumer agency is for all of us to fight back."
Seiberg said the case — in which it was revealed that 5,300 Wells employees opened accounts for millions of customers without their permission in an apparent effort to hit sales goals — complicates efforts to keep the CFPB provisions in the Hensarling bill. It also makes it harder for the GOP to win changes down the line.
"In short, it is hard to see the CFPB losing power in the wake of this enforcement action," Seiberg said.
Supporters of the bill argue that the faith in the CFPB is misplaced. Some noted that Wells Fargo claims it self-reported the violations to the CFPB — a claim the agency itself denied Tuesday, though it would not say how it learned of the bank's problems.
But in an interview on CNBC on Tuesday, Treasury Secretary Jack Lew portrayed the CFPB as the case-cracker.
"There's a lot of talk in Washington these days about rolling back Dodd-Frank, about rolling back the law that created the agency that uncovered and took action against this," said Lew on CNBC on Tuesday. "This ought to be a moment when people stop and remember how dangerous the system is when you don't have the proper protections in place. This is something that our watchdogs found. If they weren't there, it would still be going on."
That may be overstating the CFPB's role. A Wells Fargo spokeswoman said the bank first discovered the unauthorized account openings when it fired employees at a branch in Los Angeles. That prompted a 2013 story from the Los Angeles Times, which was then inundated with phone calls and emails from branch employees complaining about the sales culture at Wells. The Times released a larger investigation in December of that year, which sparked a formal inquiry by Los Angeles City Attorney, the CFPB and Office of the Comptroller of the Currency. (Representatives of the Treasury and the CFPB did not respond to requests for comment.)
"The CFPB did not discover this problem," said Brian Levy, a mortgage banking attorney with Katten & Temple in Chicago. "They did not prevent it from occurring. … Why are we saying, 'Yea, CFPB, this is why we need you,' when you can't say they did anything other than come in after the fact and levy a penalty that maybe could have been a lot greater?"
Such nuance is likely to get missed in the larger political debate over the CFPB. The Senate Banking Committee is expected to hold a hearing next week on the Wells case, which could galvanize pro-CFPB sentiment.
Speaking after the vote on Tuesday, Hensarling said he wasn't sure whether his panel would conduct an investigation.
"If the facts are substantiated, and they very well may be, Wells Fargo deserves all the punishment they are getting," Hensarling told reporters. "It is certainly deserving of further inquiry but so are the activities of [Financial Stability Oversight Council] and the activities of the" Federal Reserve Board.