Last week's vote by the House Financial Services Committee to create a consumer protection agency would centralize expansive power in the hands of its new director.
Though previous versions of the bill had granted the "agency" power to write and enforce consumer protection rules — and made it subject to oversight by a board — the bill as finally approved gave almost all of that authority directly to the agency's director.
Though two oversight panels would advise the new director, he or she would not have to follow their recommendations and instead would have a far-reaching mandate to address unfair, deceptive and abusive practices.
The director "has unfettered power to regulate, investigate, prosecute, try and sentence," said William Isaac a former Federal Deposit Insurance Corp. chairman, who is now the chairman of LECG Global Financial Services.
As a result, the agency may be less protected from shifts of political power. Other independent agencies, such as the FDIC and the Federal Reserve Board, are overseen by boards that must be bipartisan and whose members have multiyear terms.
"One of the advantages of having a board with fixed terms is, there is more stability and you don't go jerking around from one political philosophy to another to such a great extent when you have a change in administrations," said Isaac.
Though the set-up concerns a growing number of industry observers, who fear a new director could act in a way that damages the industry but not be accountable to anyone, the bill's author, House Financial Services Committee Chairman Barney Frank, defends it.
In a press conference last week, Frank said a top-heavy governance structure such as a commission could leave the consumer vulnerable and would give little protection from an administration that did not care about the issue.
"That same president would then appoint people to the commission who wouldn't work well," he told reporters. "Let's be very clear: You can empower regulators, but if [you] put into office somebody who is ideologically opposed to regulation, no structure will overcome that ideological resistance."
Still, the bill appears to establish few checks on a director's power. For example, the director would have the power to exempt any entity it regulates and any financial product or service from a consumer law or regulation.
Observers agreed that the president's pick to head the agency would be crucial.
The leading candidate right now is Elizabeth Warren, a professor at Harvard University who first suggested the creation of a consumer agency.
Warren is generally praised by Democrats for her role in leading the congressionally mandated oversight board of the Troubled Asset Relief Program. But she is opposed by much of the banking industry, which worries she would crack down on practices without regard to whether doing so could endanger safety and soundness or reduce the availability of credit.
"The president's appointment of the head is critical here as to how effective the agency is going to be, and it varies depending on the philosophy of the agency director," said Ron Glancz, a partner in the Venable law firm. "We saw that during the Republican administration; there were some agencies that were very effective, and there were others not as aggressive in terms of enforcement."
A spokesman for Warren did not return phone calls seeking comment.
A director would have to consult with two panels, which would serve only in advisory roles. One would be made up of seven regulators and five members appointed by the president and confirmed by the Senate who are experts on fair lending and civil rights. The second panel would be experts in community development appointed by the new agency's director.
This worries even some consumer advocates who support the CFPA. Robert Gnaizda, a counsel for the Black Economic Council, said there is a danger that consolidating power in a single person could lead to problems.
"It's always the possibility that even the best intentions go awry," he said. "The dilemma for consumer advocates is that there isn't anybody that we can be sure we can rely on forever."
Still, he said, the agency needs to have broad authority because the existing regulators were not up to the task.
In its structure, the agency is most similar to the Federal Housing Finance Agency established last year. The director of that agency, which regulates the government-sponsored enterprises, must consult with the Fed and Treasury but largely has a free hand.
"It's a tremendous amount of power," said Cornelius Hurley, a former Fed lawyer who now directs the Morin Center on Banking and Financial Law at the Boston University School of Law, referring to the CFPA. "The only parallel I can think of is the Federal Housing Finance Agency, which is an incredibly powerful agency of one person, with no board and no advisers."
Republicans tried to use the issue during debate on the bill but were unsuccessful in achieving changes.
"This delegation of congressional authority to one bureaucrat without oversight is unprecedented," according to a Republican press release sent Thursday. "There are 33 independent federal agencies, and none of them has a director with the autocratic authority that would be delegated by this legislation."
The director would face at least a few constraints.
The bill would create a mechanism to resolve supervisory disputes between prudential examiners and the consumer protection agency. If the two sides conflict, an institution could request a joint supervisory statement due in 30 days. If the conflict remained unresolved, disputes would be settled by a majority ruling of a governing panel that includes representatives of the CFPA, the primary federal banking regulator and the agency that heads the Federal Financial Institutions Examination Council.
Ultimately, however, the CFPA director could exert power even over institutions outside the agency's authority. Though an amendment was adopted exempting banks with $10 billion or less of assets from enforcement by the new agency, the director would retain the power to look at any institution's exam report. He or she could also ensure that agency staff attended an examination and even take power from the banking regulator on a case-by-case basis if the director concludes that the banking agency's oversight is insufficient.
Arguably the most important check on the director's power would be purse strings. Though the agency would be primarily funded by fees, the director also would have authority to ask Congress for more money.
Observers said the bill could change significantly when it goes to the Senate. It is unclear how Senate Banking Committee Chairman Chris Dodd plans to address the agency's structure.
This story has been reprinted with permission from American Banker.
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