R.I.P., Consumer Financial Protection Agency
The Consumer Financial Protection Agency is dead. The deceased stopped breathing sometime between outgoing Sen. Chris Dodd's decision to gild his political legacy by whatever means necessary and congressional Republicans' resolution to shoot any bill that moves.
Yes, I know that technically the patient is still kicking, as lawmakers ponder whether to establish the CFPA within one of the existing bank regulatory agencies. Reflex. The involuntary twitching of another key Obama administration proposal snuffed out by industry lobbying, election-year brinkmanship and legislative cowardice.
Dodd, a Connecticut Democrat, is so desperate to win passage for his financial reform measure before leaving office that he's caving to Republican opposition to the CFPA:
"I don't want to go to the floor of the United States Senate begging for a 60th vote," Dodd told the Obama administration during a Tuesday hearing. "I'm not going to do that."Or in Capitol Hillese: Uncle. Just to make sure no one misses the white flag fluttering in the breeze, Dodd on Friday planted a big, wet one on Sen. Richard Shelby, R.-Ala., who as the Senate Banking Committee's ranking member is leading the fight against the CFPA.
"I appreciate the good work that has been done to this point by Senator Shelby and the other Banking Committee members who have worked so hard in this process," Dodd said. "Over the past two months we have had productive bipartisan negotiations in a number of areas, and I intend to incorporate many of those agreements in this new proposal."Sausage making? Only if you like your links without the meat. Because the CFPA, while no panacea for some of the baser practices common during the housing boom, is the only idea on the table that stands a chance of protecting financial customers.
While the precise causes of the housing bubble and subsequent economic crisis remain under debate, its effects are not. Consumers got blasted. People were steered toward pricey, dangerous mortgages so lenders could pad profits. Loan officers instructed borrowers to lie. At the other end of the pipeline, Wall Street securitized loans into abstraction. And the leverage, and bonuses, did flow.
One reason this happened is that, unlike with, say, the FDA's oversight of prescription drugs, no government agency devotes itself to safeguarding people against deceptive and unfair financial practices. Not that we don't have laws offering such protection -- we do. And not that financial regulators don't have authority to enforce those laws -- they do.
Under the 1994 Home Ownership and Equity Protection Act, for instance, the Federal Reserve is charged with protecting consumers from predatory mortgage lending. It failed -- spectacularly. One reason was that the main mission of the Fed, along with that of the other main banking regulators -- FDIC, OCC, OTS -- is to monitor the "safety and soundness" of banks, not to look after the welfare of consumers.
Former Fed governor Frederic Mishkin acknowledged that in telling lawmakers this summer that "the Federal Reserve should give up its role as a consumer protection regulator.... The skills and mindset required to operate as a consumer protection regulator is fundamentally different from those required by a systemic regulator."
Recent history shows he's right. Which returns us to the scene of the crime. Dodd, in considering whether to situate the CFPA within one of the bank regulators, rather than insisting that it stand alone, is helping Shelby stifle the agency before it's even born.
Where shall we place accountability for consumer protection? The Fed, as discussed, is unsuitable. The OCC or OTS (the latter of which would disappear under the Dodd plan)? Both proved unequal to their primary job of regulating banks in the years leading up to the crash, let alone the ancillary task of policing financial products. These agencies knew years before subprime became a dirty word that banks had chucked their underwriting standards out the window. They did nothing.
OCC chief John Dugan, who opposes the CFPA, is actually on the record saying that "consumer protection cannot be separated from [bank] safety and soundness" concerns.
Why not? They're different ends, requiring different means. As we've seen all too well, a financial institution can function safely and soundly while screwing its customers into the poorhouse (Skeptics can test my theory by trying to get their mortgage modified.)
Another reason not to install the CFPA within one of the banking agencies is that they're highly susceptible to political pressure. That's something big financial firms are rather adept at applying. What confidence can consumers have that regulators -- even good ones like FDIC head Sheila Bair -- will stand up for them in the face of concerted industry lobbying?
An independent CFPA wouldn't be immune to such pressures. But it would have a fighting chance. Consumers would too.