Congress playing chicken with Dodd-Frank reform

WASHINGTON — A Senate Republican effort to use an obscure legislative process to restructure the Consumer Financial Protection Bureau could derail any bipartisan agreement on targeted changes to the Dodd-Frank Act.

While the chances of sweeping financial reform are remote, Senate Banking Committee Chairman Mike Crapo and his Democratic counterpart, Sen. Sherrod Brown of Ohio, have voiced optimism about enacting narrower changes.

Yet that effort could be in jeopardy before it begins in earnest if GOP lawmakers attempt to use the reconciliation process — which allows the Senate to pass changes to the budget by majority vote — to make changes to the CFPB.

“Republicans face a strategic dilemma on that issue,” said Ian Katz, a policy analyst at Capital Alpha Partners. “If they start off insisting that the CFPB be funded through the congressional appropriations process, the Democrats might not cooperate on other issues.”

Sen. Pat Toomey, R-Pa.
Senator Patrick "Pat" Toomey, a Republican from Pennsylvania, listens during a Senate Banking Committee hearing with Janet Yellen, chair of the U.S. Federal Reserve, not pictured, in Washington, D.C., U.S., on Tuesday, Feb. 24, 2015. Yellen said inflation and wage growth remain too low even as the job market improves, and she signaled that a change in the Fed's guidance on interest rates won't lock it into a timetable for tightening. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Pat Toomey

For now the two drives appear on separate tracks. Crapo has talked about working with Brown to identify and develop individual bills with bipartisan support so that policymakers can put “points on the board” to give institutions regulatory relief.

Sen. Pat Toomey, R-Pa., meanwhile, appears to have largely given up on that effort, and is instead pushing to use reconciliation to make bigger changes to Dodd-Frank, including targeting the CFPB.

“I don’t see much prospect of getting eight Democrats” to support “big” Dodd-Frank reforms, Toomey said last week, referencing the number of Democrats necessary to overcome any filibuster attempt. “Until we see that, I think we have to be willing to proceed using reconciliation.”

Some observers see the situation as a legislative game of chicken. Republicans appear to be threatening to use reconciliation if Democrats refuse to come to the table and agree to at least some changes.

“This is a political calculation that Brown has to make. If he doesn’t get a deal on Dodd-Frank with Crapo, then there is a little good-cop/bad-cop going on. There is a plan B,” said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods.

The changes Toomey appears to want most — restructuring the CFPB — is the area where Democrats are least likely to deal. Senate Democrats have been adamant that any alterations to the consumer bureau are a nonstarter, which would leave reconciliation as the only way to get them enacted. Republicans would have to decide if those changes are more important than others where they might find bipartisan support, such as raising the threshold for banks considered systemically risky.

Moreover, there are questions about whether Republicans even want to go along with Toomey’s reconciliation plan. Such a strategy would face both political and mechanical challenges and opens moderate GOP lawmakers up to charges that they are against consumer protection.

“How many Republican moderates will be able to look at the faces of their constituents and say, I voted to gut the consumer bureau?” said Andy Green, managing director of economic policy at the Center for American Progress. “That is going to be a very stark music they will have to face.”

G. William Hoagland, senior vice president at the Bipartisan Policy Center and a former staff member and director of the Senate Budget Committee, said getting to reconciliation is not an easy task.

“Congress first has to pass a fiscal year 2018 budget resolution that would include reconciliation instructions," Hoagland said. "That is going to create some tension and some difficulties in just passing a resolution for 2018 to get to reconciliation. There is a huge fence to overcome first.”

Edward Mills, a policy analyst at FBR Capital Markets, said Republicans are more focused on getting some tax reform as part of the reconciliation process.

“The eye on the prize is getting some level of tax reform to reconciliation,” he said. “I am skeptical that there is going to be much to do on budget reconciliation on Dodd-Frank.”

Because the CFPB gets it funding from the Federal Reserve Board, which is considered off-budget, it is also unclear what changes to the bureau would even qualify for reconciliation, which can be used only for legislation that has a direct impact on the budget.

“If it were simply a straightforward issue about revenues or direct spending," Hoagland said, "there is no question they could use reconciliation. It is this complication because the funding is coming from that off-budget agency.”

However, he added, “since Congress created this funding mechanism, I would assume … they could reconcile a savings by not allowing the Federal Reserve to make that funding contribution to the bureau.”

Aaron Klein, a fellow in economic studies at the Brookings Institution and former chief economist at the Senate Banking Committee, questioned the logic behind such a determination.

“I have yet to see the compelling case as to why CFPB changes would reduce the deficit unless the intention is not to enforce the law,” Klein said. “If you eliminated the CFPB, most of the laws revert back to the Fed, so the Fed has to pay money and enforce the laws.”

During a speech last week, Toomey said he would be “perfectly happy” with eliminating the CFPB. But he told reporters afterward that while subjecting the bureau to appropriations is doable because it reduces the deficit, it might be tougher to include other changes, like changing its structure from a single director to a commission.

Some experts said Republicans’ options are limited.

“They could defund it; that is straightforward budgetary stuff,” said Douglas Holtz-Eakin, president of the American Action Forum and the former director of the Congressional Budget Office.

But beyond that, the issue gets tricky, he said.

“The rule-of-thumb answer is the provisions … have to be primarily budgetary in nature, which is often misinterpreted as saying they affect the federal budget,” Holtz-Eakin said. “At the CFPB, there are going to be things like enforcement authority that will affect fines and judgments and lawsuits, and there will be lots of budget implications to that, but they are not primarily budgetary in nature. I don’t think they will be able to get rid of that in reconciliation.”

The question of what Republicans can pursue will ultimately be answered by the Senate parliamentarian.

“The most powerful woman in town these days is an Elizabeth, and it is not Elizabeth Warren, it is Elizabeth [MacDonough] the parliamentarian,” Hoagland said.

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Dodd-Frank Financial reform Regulatory reform Regulatory relief Mike Crapo Sherrod Brown CFPB
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