Congressional Pressure Intensifies for CFPB Reform

With near-perfect unity, Senate Republicans joined their House counterparts this week in calling for significant structural reforms to the new Consumer Financial Protection Bureau (CFPB). And unlike the House, the Senate can take hostages.

On Monday, 44 Republican Senators sent a letter to President Obama threatening to block any CFPB director nominee—regardless of party affiliation—unless their concerns regarding the new agency’s structure and lack of appropriate accountability mechanisms are addressed by Congress. Senators Scott Brown (MA) and Lisa Murkowski (AK) were the only Republicans not to sign the letter.

Specifically, the GOP letter calls for the adoption of reforms in three main areas, including:

  • Leadership Structure - Alter the CFPB’s leadership structure from that of a single director to a board of directors, similar to the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, or Securities and Exchange Commission (SEC). GOP senators expressed concern that Dodd-Frank “failed to provide any real checks on the CFPB director’s powers” by providing limited tools for Congress or the administration to remove a director for poor performance and granting the director with “unfettered authority” over the CFPB’s annual budget.
  • Funding Source - Subject the CFPB to the congressional appropriations process. Under Dodd-Frank, the CFPB’s funding will derive from a set percentage of the Federal Reserve’s operating expenses budget and could be as high as $500 million in FY12.
  • Oversight Mechanisms – Provide prudential bank regulators with stronger tools to prevent CFPB regulations that may impact the safety-and-soundness of banks. Dodd-Frank allows the Financial Stability Oversight Council (FSOC) to veto a CFPB regulation with a two-thirds majority vote if such a rule puts the safety and soundness of the entire U.S. banking system in jeopardy.

The letter is welcome news to House Republicans, whose ongoing efforts to weaken the CFPB have been persistent, but admittedly fruitless without the Senate GOP, whose leverage over the impending CFPB director confirmation process is a key component in the debate. The White House is aiming to have a permanent director in place before the CFPB fully assumes its statutory authorities on July 21, 2011.

The move also comes at a particularly propitious time, as the House Financial Services Committee passed on Wednesday three CFPB reform proposals, including a bill that replaces the CFPB’s single director with a five-member bipartisan commission (H.R.1121, the Responsible Consumer Financial Protection Regulations Act of 2011), a bill that makes it easier for the FSOC to veto CFPB-issued regulations (H.R. 1315, the Consumer Financial Protection Safety and Soundness Improvement Act of 2011) and a bill that would postpone the date for the transfer of functions to the CFPB if the Bureau does not yet have a director in place by the July 21 transfer date (H.R. 1667).

If the White House and Congressional Democrats refuse to budge on GOP demands for reform, it appears increasingly certain that President Obama will be forced to circumvent the Senate confirmation process through a recess appointment. According to White House officials, Elizabeth Warren, the Assistant to the President and Advisor to the Treasury Secretary for implementation of the CFPB, remains on President Obama’s short-list for the director position, despite fierce objections to her candidacy within the GOP.

During a congressional hearing in March, Ms. Warren testified that Congress made the “right decision” in choosing a consolidated directorship in favor of a five-member board, citing the Office of the Comptroller (OCC) and Office of Thrift Supervision (OTS) as examples of single director agencies that Congress centralized in order to create “a more efficient operation.” Ms. Warren has also defended the CFPB’s independent funding source in order to avoid potential politicization of the agency’s consumer protection responsibilities, while arguing that the FSOC’s current ability to veto CFPB regulations is not true for any other agency.

With less than three months remaining before the CFPB officially opens its doors, the debate on Capitol Hill over this controversial new agency just got a little bit more interesting.

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