The Consumer Financial Protection Bureau: 4 Reasons It Will Be A Stepchild To Big Daddy Regulators

Tonight, Senator Chris Dodd will bring his financial reform proposal before the Senate Banking Committee, of which he is Chairman. While his proposal is a significant compromise from the version he proposed in November, those compromises haven't stopped Republicans from attacking the bill with a flurry of amendments. The fact that the Consumer Financial Protection Bureau - the part of the bill that addresses consumer abuses - has already been significantly weakened, does not bode well for any positive impact this bill may finally have for the American consumer.

It's a far cry from what the President originally proposed, or even what the House ultimately passed. That's because the Senate proposal creates a Consumer Financial Protection Bureau that does not have the authority, the autonomy and the power to protect consumers from the unsafe loan products that caused the current economic crisis. If it's approved as written, we will create a mirage that encourages us to believe we have consumer protections when, in fact, we don't. Some say that the more important part of the bill addresses systemic risk, and that consumer protection is of less importance. But not protecting consumers is the real systemic risk.

Here is four reasons why the Consumer Financial Protection Bureau is too weak, from the National Community Reinvestment Coalition's analysis of the bill.

First, the Bureau does not have any enforcement power of existing consumer rules and any new rules it might write in the future for over 90 percent of the 8,022 nation's financial institutions. Who does? The same regulators who did nothing to protect consumers during a decade of bad lending practices that just didn't contribute to but caused the economic crisis we face today. The Bureau's limited authority covers only 107 large banks with over $10 billion in assets and mortgage companies, most of whom have closed shop.

Second, while the Bureau (note it was an independent Agency in the President's bill) may write rules for all financial institutions, consider the hurdles it has to jump to finalize them. We counted no less than 10 in a gauntlet of barriers that make it difficult to approve consumer protections. For example, there is so much "conferring" with the Big Daddy regulators that by the time a rule is finished, it will have been hacked to death.

Third, the veto power in the bill is real and will stop substantive consumer protections in their tracks. The Financial Stability Oversight Council, composed of the same regulators who ignored the warning signs leading to the global economic meltdown of 2008, can veto consumer protection rules with a two-thirds vote on measures that the oversight council deems a "safety and soundness OR systemic risk concern." That is not a high bar to cross.
If the Federal Reserve (the Fed) Chairman doesn't like a pro-consumer rule, do we really believe the other regulators will vote against him? And, do we really believe the Fed will stand up to Wall Street once the economy stabilizes and the heat is off?

If recent Fed actions are any indication, it won't. The Fed has failed so far to write rules, as required by the credit card reform legislation, to protect consumers against usurious penalty interest charges by credit card companies. In 2008, the Fed finally issued rules outlawing unfair and deceptive practices in the mortgage market. Congress passed the law barring predatory lending in 1994, but it took the Fed 14 years to write the very rules that would have prevented the foreclosure tsunami and much of the financial crisis. Even its own consumer advisors don't think the Fed should be in charge of consumer protections.

Fourth, the Federal Reserve Board will have control over the Bureau's budget with a spending ceiling but no floor. If you control the money, you control everything.

Let's not forget what caused this train wreck in the first place. Having test marketed a number of defective loan products (loans with no documentation, exploding interest rates, interest-only payments) in low-income and minority neighborhoods during the mid to late 90s, lenders and Wall Street suddenly realized how much money they could make if they took their products to scale, targeting middle-class suburbia. They sold like hotcakes. For once, lenders didn't discriminate based on race. They sold their junk to anybody.

The President's bill got it right. It created a fully independent consumer agency with real authority and enforcement power. Over 70 percent of the public supports substantive financial reform, including strong consumer protections. It is a shameful statement on our "pay to play" politics that a more aggressive bill - that focuses on the real culprits of the economic crisis-- cannot find support among both Democrats and Republicans. The bankers and Wall Street may have forgotten how to make a good loan, but they haven't forgotten how to lobby.