Wednesday, June 21, 2017
The Treasury’s new report is the first in a series intended to identify and propose changes to onerous federal regulations, treaties, regulatory guidance, supervisory standards and other government policies. Like the Financial CHOICE Act, the report takes aim, in particular, at changes ushered in by the Dodd-Frank Act, an omnibus financial reform package passed in response to the 2008 financial meltdown and ensuing major recession. By Treasury’s reckoning, that legislation required about 390 regulations implemented by more than a dozen federal agencies.
“A sensible rebalancing of regulatory principles is warranted in light of the significant improvement in the strength of the financial system and the economy as well as the benefit of perspective since the Great Recession,” Treasury wrote. “Through thoughtful reform, the soundness of the financial system can be further strengthened.” For example, by dialing back the powers of the CFPB.
The CFPB has been controversial from the start, largely because of the scope of its power, its leadership structure and its funding. It was established as an independent agency of the Federal Reserve and given broad supervisory and enforcement authority over large financial institutions with respect to consumer protection laws. These consumer-protection laws were previously enforced by bank regulatory agencies and the Federal Trade Commission. The Dodd-Frank Act also gave the CFPB broad supervisory and enforcement powers over nonbank providers of consumer financial products, like mortgage lenders and prepaid card companies.
Unlike other federal consumer protection agencies, which are run by appointed board members (for example, the FTC and the Securities Exchange Commission), the CFPB is led by a single director, appointed by the President for a five-year term, who can only be removed for “inefficiency, neglect of duty, or malfeasance in office.” (A federal court ruled last year that this leadership structure rendered the CFPB unconstitutional, and the bureau is appealing that ruling.)
The CFPB also skirts the congressional appropriations process that most other federal agencies confront yearly. Instead, it draws funding from Federal Reserve System earnings, which in 2016 totaled $564.9 million, according to a Treasury report. The CFPB also has access to funds from civil penalties it imposes that are not used to pay restitution to consumers.
In its report, the Treasury Department describes all of these problems in detail and concluded that “the CFPB has exercised its authorities in a manner aimed at maximizing its discretion, rather than creating a stable regulatory environment.” For example, the report noted, the CFPB has brought enforcement actions against financial services providers “despite not having promulgated rules banning the targeted practice or issued guidance that it considered the practice contrary to law. Remarkably, the CFPB has even sanctioned companies for complying in good faith with an interpretation adopted by a previous agency with respect to conduct that pre-dated the CFPB’s establishment.”
Treasury said the solution for these and related problems is to reform the structure of the CFPB so that it becomes accountable to elected officials, is run by a board, and is funded through congressional appropriations. The report also recommends that the bureau’s rulemaking be more akin to other regulators – with public notice, comment periods and regular reviews to weed out unnecessary and/or outdated requirements. And it wants Congress to repeal the CFPB’s power to examine financial institutions for compliance with consumer protection laws, entrusting that responsibility solely to federal financial institution regulators.
The June 12 report – which weighed in at 149 pages – also deals exclusively with the supervision of banks and credit unions. Still pending are reports detailing sought-after reforms in capital markets regulation; asset management, insurance, and retail and institutional investment rules; and the oversight of nonbank financial institutions, financial technology firms and financial innovations.
In addition to revamping the CFPB, the report calls for better overall coordination among financial regulatory agencies, easing restrictions on bank trading operations, scaling back banks’ annual stress tests, and simplifying regulation of small banks and credit unions. It also recommends broader authority for the Financial Stability Oversight Council, an inter-agency group led by the Treasury that monitors and addresses overall risks to financial stability – risks that often span industries and markets.
Initial banking industry reactions to the report have been positive. Tim Pawlenty, Chief Executive Officer of the Financial Services Roundtable, said the Treasury tome “is an important step toward modernizing America’s financial regulatory system so both economic growth and consumer protection are advanced.”
Senator Elizabeth Warren, D-Mass., who spent time leading the CFPB in its early days, blasted the Treasury report. She said it “calls for radical changes that would make it easier for big banks to cheat their customers and spark another financial meltdown.”
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