The House of Representatives will hold hearings this week about the Consumer Financial Protection Bureau, with congressional critics of the new agency complaining that it shouldn’t be involved in cleaning up the home mortgage foreclosure mess or making sure the mortgage service companies fix their mistakes. They’ve even voted to slash its budget through the appropriations process, contrary to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established and funded the new bureau.
Prior to the passage last year of the Dodd-Frank Act, there was no accountability for consumer financial protection. Seven different federal agencies had some say over consumer finance, but none of them had consumer protection as their No. 1 job. Each one of them could point fingers at each other when nothing happened.
The results were predictable. Credit card companies could spring unfair surprises on card holders. Mortgage brokers got paid more to put people into loans they didn’t understand and couldn’t afford. A whole industry grew up around “liar loans.” And our financial system, and our nation’s economy, was brought to its knees.
Today, we have a chance for a fresh start with real accountability for consumer financial protection. The new bureau can set the rules of the road for consumer finance and make sure American households have the information they need to make their own choices.
One agency will enforce the law across the consumer financial marketplace. No more races to the bottom in lending practices. No more sneaking through loopholes or hiding behind fine print. No one can point fingers because one agency is in charge.
Contrary to the critics’ claims, the agency is fully accountable to the American people. And importantly, it is insulated from the kind of industry or political pressures that might undermine its independence.
While the agency is being set up it is housed within the Treasury Department, with the Treasury Secretary accountable for all of its actions. In setting up the new bureau, Elizabeth Warren serves as Treasury Secretary Timothy Geithner’s Special Advisor, and testifies before Congress as a Treasury official. Congress has full authority to review the agency activities, just like any other part of the Treasury Department.
Once it is established as an independent agency, the Consumer Finance Protection Bureau must report to Congress on its budget. Its director must be confirmed by the Senate and testify before Congress. Like all of its sister bank regulators, the bureau’s budget isn’t tied to the political appropriations process. Rather, the agency must operate within a cap set by statute and make its budget available for all to see. And like all federal agencies, all the bureau’s actions are subject to the rules of the Administrative Procedures Act, to oversight by Inspectors General, GAO and the Congress, and to judicial review.
Further checks and balances are built right into the statute. The agency has to consider the costs and benefits of its proposed rules. It must consult with other agencies and respond in writing when it disagrees. There are procedures for coordinating with the bank agencies and other federal and state regulators. In the unlikely event that the agency impinges on safety and soundness of the financial system, the newly created Financial Stability Oversight Council can override the agency’s rules with a two-thirds vote.
Moreover, the Bureau must publicly review its rules every five years to be sure the rules aren’t overly burdensome and are addressing the key problems. The GAO must conduct an annual audit. Small businesses have clearly defined opportunities to weigh in on agency rules. And the public can submit complaints that the Bureau will use not only to solve problems but also to help prevent abuses from happening in the first place.
Indeed, the Bureau needs to report annually to the Congress on consumer complaints. And its director must prepare reports and appear before Congress semi-annually to justify the steps that the agency has taken—or not taken—to protect consumers.
What the critics really want, when they say they want accountability at the consumer agency, is a consumer bureau that’s accountable to the banks. All stakeholders’ voices must be heard, but we need an agency that’s got the independence it needs to be accountable to the American people.
Michael S. Barr is professor of law at the University of Michigan Law School and a senior fellow at the Center for American Progress. He served as assistant secretary of the Treasury 2009-2010.