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Is Congress Crippling Consumer Finance Reform?

Has Congress found a way to exert its political will on the supposedly independent Federal Reserve Board? And, in the process, murder the infant Consumer Financial Protection Bureau?

If so, say goodbye to future, broad actions to save consumers from credit card and other financial abuse, including the enforcement of current laws. Government action against deception could turn out to be even weaker than it was before the financial collapse. The Fed might be weakened, too.

The latest budget proposed by the House Republicans whacks the new consumer bureau, by taking away nearly half of the money needed this year to get the office up and running. Instead of the $143 million the regulators were expecting, the House wants to limit the CFPB to no more than $80 million. (To give context to that number, JP Morgan Chase gave its CEO, Jamie Dimon, a $17 million stock bonus this year. That's almost one-fifth of the amount of money the GOP would spend to protect Americans from mistreatment by banks in general.)

Starving the CFPB isn't supposed to be possible. The bureau is housed in the independent Federal Reserve System. The Fed doesn't depend on Congressional appropriations to do its business, it funds itself, primarily from the interest it earns on U.S. Treasury securities. The Dodd-Frank law directs that up to 10 percent of the Fed's income be used, this year, to establish and run the new CFPB. By 2012, the bureau will be entitled to as much as 12 percent of Fed income -- estimated at around $500 million a year.

To the legislators who supported the CFPB, that looked like a way to keep it safe from attack by the minions of the powerful financial industry. The bureau needs a predictable budget if it's going to stand up for you against predatory lending and abusive contracts and fees.

But the GOP thinks it has found a weapon in the House Appropriations Committee. They didn't cut the budget directly, which is definitely not allowed under the Dodd-Frank law. Instead, they have ordered the Federal Reserve not to transfer any more than $80 million into the CFPB's account. If successful, this would slow hiring and hobble enforcement of existing regulations, let alone allow the bureau to take action against new forms of abuse and fraud.

Does the Appropriations Committee have the power to do this? One GOP argument is that the Dodd-Frank law itself opened the door to Congressional action. The CFPB has the right to ask Congress for an additional $200 million, if it thinks it needs the money. So even though the bureau hasn't asked, Republicans claim that this clause puts all of its spending under Congressional oversight.

Jennifer Hing, spokesperson for the committee's GOP majority said that even the future $500 million -- a transfer entirely from the Fed -- amounted to "taxpayer funds." As a result, she said, the CFPB should come under Congressional "safeguards, oversight, and control."

But they're not taxpayer funds. The income is generated entirely by the Federal Reserve, which earn interest on Treasury securities. "Taxpayers won't pay a dime to support the CFPB's activities," says Travis Plunkett, legislative director for the Consumer Federation of America.
Here's the plain language of the Dodd-Frank law: "Nothwithstanding any other provision in this title, the funds [for the CFPB] derived from the Federal Reserve System pursuant to this subsection shall not be subject to review by the Committees on Appropriations of the House of Representatives or the Senate."

The House has reviewed, and sliced, the funding anyway. It not only cut down the CFPB, it interfered with the way the Fed is supposed to spend its money. Can it direct Fed spending in other ways? Federal Reserve spokesperson Susan Stawick said that its legislative staff had nothing to say about this turn of events. There was no comment from its legal division, either. "The Fed will follow the law," she said.

The next budget battle comes on March 4, when the GOP says it will shut down the government if it doesn't get the cuts it wants. Previously, the Senate protected the CFPB. It hasn't yet spoken on whether it agrees with the House's interpretation of the law. If it goes along, even with a small cut, the wall that supposedly protects the bureau's independence will be nothing more than a picket fence. More cuts will follow. Consumers will lose, the banks will win, and the Fed's independence will have been breached.

For years, Congress underfunded the Securities and Exchange Commission, while Wall Street ran wild. The GOP's budget tries to pull that trick again. Consumer protection could meet the same fate.

If it does, consumers will have even fewer defenses than they did before. Prior to the financial reform law, the federal government had seven, scattered consumer protection offices, none very effective. To take just one example, the Fed's own office that oversaw mortgages ignored the subprime lending frauds until they led the economy into collapse.

Under the financial reform law, all these officers were consolidated into CFPB, whose only mission is to stand up for the consumer against bullying and complex financial institutions. If the new bureau is crippled, there's nothing else to take its place. White House advisor Elizabeth Warren, who first proposed the idea of a consumer financial protection agency, has always said that she'd rather have no CFPB than have a weak one that couldn't function. A "pretend" bureau would be the worst of all.

While waiting to see if the Senate will all the budget the axe to fall, the CFPB continues to pull itself together. Warren is selecting staff and promoting simple, fair agreements for mortgages and credit cards, so that you'll be able to compare costs. The newly named chief enforcement office and former Ohio attorney general, Richard Cordray, says he'll start enforcing existing laws as soon as the bureau officially opens in July.

It's badly needed. Despite the public anger about abusive financial institutions, they've continued to have the upper hand. In recent month alone, we've seen:

  • Illegal foreclosures, including foreclosures on families with a breadwinner in the active military.
  • Subprime credit cards that skirt federal rules on fees and sink borrowers into debt from the day the card arrives.
  • Prepaid cards with high fees and few consumer protections.
  • Banks that hard-sell expensive overdraft programs to holders of debit cards, and manipulate debits to increase the fees you pay.
  • Payday lending on the Internet, charging undisclosed triple-digit interest rates for short-term loans, with renewals built-in.
"Good, solid financial businesses have nothing to fear and maybe much to gain," if the CFPB goes after the bad actors, Cordray said in an interview with the Wall Street Journal. Trouble is, some of those bad actors are the financial industry's biggest names.

We're about to find out if the bankers that we, the taxpayers, saved from collapse will be turned loose to manhandle us again.

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