Is the Consumer Financial Protection Bureau Dead in the Water?

Last Updated May 19, 2011 9:14 AM EDT

What's high on the hit list in Washington DC today? The new Consumer Financial Protection Bureau, which was created to defend you from lying and predatory lenders. The financial industry hates the bureau and wants it gone. Their lobbyists and legislators couldn't stop it from being enacted into law. Now, they're trying to cripple it so that it can't do you any good.

The first shot, in March, came from the House of Representatives, which passed a resolution to starve the CFPB of funds. The Senate fired the second shot a week ago. Forty-four Republican Senators signed a letter to President Obama, telling him that they wouldn't confirm anyone he nominated as director of consumer protection -- not even a Republican -- unless the bureau was restructured to their liking. It takes just 41 votes to kill a nomination (in the Senate, minorities -- not majorities -- rule), so the GOP has the upper hand.

At first blush, that might sound like a bureaucratic battle that won't matter much to consumers one way or the other. Not so. The outcome is crucial to the CFPB's success. The bureau was set up to operate independently, so that a hostile Congress (and banking lobbyists) couldn't cripple its work. If the GOP undermines that independence, you can kiss pro-consumer rulemaking goodbye.

Congress established the CFPB in 2009 precisely because the existing consumer protection offices had quit doing their job. They were scattered through seven different government agencies, which paid little attention to them. In fact, they'd been co-opted by the very institutions they were supposed to regulate. For example, they had the authority to stop (or raise the alarm about) predatory, subprime credit cards and mortgages, but did nothing -- even in the face of studies proving that consumers were being deceived. One agency -- the Office of the Comptroller of the Currency -- even went to court to stop states from enforcing their own financial-protection laws against national banks.

After the crash, it seemed clear that the whole economy might have been safer if mortgage brokers and lenders has been stopped from peddling deceptive loans. Congress decided to gather the seven toothless offices into a single bureau focused only on consumer protection. The bureau also received new powers to block abuses by payday lenders, student lenders, and mortgage brokers and servicers.

Currently, the bureau is being set up by White House advisor Elizabeth Warren, from a perch in the Treasury Department. She is hiring staff, setting priorities, and working on the CFPB's first project -- simpler, advance disclosures of what a mortgage will cost. The law specifically asks the bureau to do that.

Now we come to the crux of the bureaucratic fight.

The CFPB opens, officially, on July 21. By law, it will acquire the scattered consumer-protection powers of the existing seven agencies. But it can't exercise any of its newer powers until a director is confirmed by the Senate.

What happens if the Senate refused to confirm anyone President Obama proposed? Warren can continue working, hiring, and preparing new regulations for further action. Presumably, regulations could be proposed under existing powers, although that's unclear. But none of the bureau's new powers could take effect. Payday lenders and mortgage servicers -- including the servicers who have been bringing bogus foreclosure actions -- could continue as before. It's even unclear whether new disclosure rules on the true cost of mortgages could go forward. The bureau will be frozen in time and place until a new director is on board.

What does the GOP want, as the price of letting the agency live? Instead of a single director, they want it run by a five-member commission made up of Democrats and Republicans, which would have to agree or compromise on any new disclosures and rules. If that's not stalemate enough, a majority of the bank regulators could veto any proposed pro-consumer rule that their banking clients didn't like. They even want to delay past July 21 the CFPB's authority to enforce existing consumer laws. Nothing would be policed at all.

The CFPB's senior spokesperson, Jen Howard, declined to comment. No Democrat has discussed a counter-strategy. It has long been clear that Warren, who conceived of the CFPB, could not be confirmed -- the GOP and the banks object because she's so clearly on the consumer's side. At first it appeared they wanted a milquetoast they could dominate. Now, they want a commission set up to do nothing at all. In a stalemate, the bankers win.

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