The war over consumer financial protection intensifies

May 3, 2011: 12:21 PM ET

A series of bills aimed at watering down the Consumer Financial Protection Bureau will be up for vote this week. What's a consumer agency that can't protect?

by Abigail Field, contributor

FORTUNE -- An obscure but extremely important political war is being fought in Washington right now over the design and power of the Consumer Financial Protection Bureau, the new agency created in the wake of the financial meltdown to protect consumers and help prevent another financial crisis.

Either the banks will win or the American people will win. It's impossible for both stakeholders to declare victory.

Ready for a fight.

The fight will only get more interesting if Elizabeth Warren, currently the special advisor in charge of the agency, gets the nod from President Obama to run it, as is expected. It's worth noting that if this agency had existed before the housing bubble, we would have most likely avoided the worst of it and the financial meltdown it triggered. But it would have been powerless to help under the laws currently proposed. Although many factors fed the crisis, the "but-for" cause was the millions of mortgages that never should have been made during final years of the housing bubble. Those mortgages fraudulently pushed home prices into the stratosphere and filled many of the securities that so quickly turned to junk. The Consumer Bureau could have prevented those loans from being made.

And yet the very players who brought us the bubble and the meltdown -- the big banks that stopped underwriting their loans and offloaded them to investors -- are pushing hard to make the Consumer Bureau so feeble it won't be able to stop a future bank-driven disaster. The banks are spending tremendous cash on lobbying, and their trade groups are telling Representatives to vote for weakening the Bureau.

Sen. Jim DeMint (R-SC) is leading the Senate effort, trying to get rid of the Consumer Bureau entirely. But the greatest threat to the Consumer Bureau is "efforts by House Republican leadership to eviscerate it little by little," according to Travis Plunkett, legislative director of the Consumer Federation of America. "They realize that financial reform is still very popular with the public so instead of a head-on assault, they're taking a death by a thousand cuts approach."

Two of the bills Plunkett is talking about are scheduled to be voted on by a House Financial Services subcommittee on May 4. Both are ultimately expected to pass both the committee and the House of Representatives.

One bill, sponsored by Rep. Spencer Bachus (R-AL), would render the Consumer Bureau less able to act, less efficient, and thus less powerful, by putting a bipartisan committee in charge instead of a single director. Another bill, by Rep. Sean Duffy (R-WI), would effectively neuter the Bureau, preventing it from issuing meaningful rules.

Not all regulators created the same

To really understand who has power in Washington, it's helpful to contrast the Consumer Bureau's rule-making power with that of the main bank regulator, the Office of the Comptroller of the Currency.

The OCC's rules govern national banks, and thus affect Americans everywhere. Unfortunately for consumers, the OCC often decides that its rules trump state laws, typically using that power to destroy consumer protections. For example, the OCC chose to exempt most banks from state laws against predatory lending, and took away enforcement powers from state attorneys general, as Illinois Attorney General Lisa Madigan explained to the Financial Crisis Inquiry Commission.

To make its powerful rules, the OCC complies with the Administrative Procedures Act, which all agencies have to follow. Once issued, the rules can only be vetoed by Congress, by its passing a new law.

Contrast the OCC's nearly unchecked power to Consumer Bureau's. For starters, the new agency joins only OSHA and the EPA in having to comply with two laws besides the Administrative Procedures Act when it wants to issues rules. And the Consumer Bureau faces a hurdle no other agency does: the FSOC veto (pronounced F-Sock).

In the wake of the financial crisis, Congress created the Financial Stability Oversight Commission -- FSOC -- to force regulators to work together to prevent another crisis. If all constituencies were equally powerful in Congress, the FSOC would be able to veto any regulation that "would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk." But only the Consumer Bureau's rules are subject to that veto.

So the OCC and the Federal Reserve, whose regulatory failures contributed to the financial meltdown, still can write rules subject only to Congressional override. But the OCC and the Federal Reserve can vote (with other regulators) to override Consumer Bureau rules. It helps that the veto standard is pretty high, requiring a 2/3 vote of the 10-member FSOC.

And that's where the Duffy bill comes in. The Duffy bill would not only lower the vote total needed for a veto to five out of nine, it allow the FSOC to veto any rule that made banks less profitable -- that is, any rule "inconsistent with the safe and sound operations of United States financial institutions." Seriously. A bank that is not profitable by definition isn't safe and sound, and as Adam Levitin, an associate professor at Georgetown Law School explained to the House subcommittee recently, the OCC has a track record of objecting to laws that might make banks less profitable on "safety and soundness grounds."

For example, when the Federal Reserve wrote rules making it harder for credit card companies -- banks -- to jack up interest rates, the head of the OCC objected on safety and soundness grounds. Luckily for consumers, Congress ultimately passed even stronger protections.

Since taking advantage of consumers is more profitable that obeying rules designed to protect them -- just like it's more profitable to operate an unsafe workplace and pollute lots -- having the Duffy standard would mean essentially any Consumer Bureau rule could be vetoed. This is important, since the Consumer Bureau's power extends far beyond mortgages to cover most consumer financial products. And it has a mission to particularly protect groups frequently exploited by lenders, such as our soldiers and veterans.

Consumers need the help. When two businesses cut a deal, they negotiate a contract. When consumers buy products, they agree to a fine print contract they rarely read, much less have the power to negotiate. If the Consumer Bureau has the power to write tough rules, consumers will in effect have someone negotiating for them. But not if Rep. Duffy gets his way.

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