The importance of CFPA independence

As Congress debates whether the Consumer Financial Protection Agency (CFPA) should be independent or housed in an existing department, voters may understandably dismiss the conflict as just bureaucratic infighting.  But in fact the issue may determine whether the CFPA is able to prevent future economic crises like the subprime fiasco that led to the Great Recession.
 
Banks fear that the CFPA will impose genuine consumer protection rules that would reduce their profits (and thus bonuses), even though such rules might also prevent the kind of lending that caused the economic crisis.  And so CFPA-opponents have made two arguments to undermine the agency. First, they argue that consumer protection rules should be subordinated to other rules, called safety and soundness rules, designed to keep banks from failing.  Second, they urge that the CFPA be made part of an existing agency, such as the Federal Reserve or Treasury, which traditionally protects banks.  Legislators should reject these arguments.
 
The safety and soundness argument might almost have been designed to make consumers eyes glaze over, but it is easily rebutted.   Safety and soundness rules have been with us since long before the Great Recession.  Nevertheless, they did not prevent the subprime lending that caused many banks to fail and would have crashed others had there been no bailout--despite the fact that that was their purpose.  But consumer protection rules could have prevented that lending.  In other words, consumer protection rules themselves contribute to the safety and soundness of banks.  Perhaps we should be wary when the industry that brought the economy down by making unsafe loans tells us that safety practices should trump rules that could have barred those unsafe loans. 
 
The second argument--that the CFPA should be placed in an existing agency--flies in the face of recent history, but it is a history few consumers know.  Long before the subprime crisis, Congress gave the Fed the power to prevent the type of subprime loans that blew up, powers similar to those the CFPA would have.  But not only did the Fed not use that power until 2008, far too late to avoid the crisis, the Fed also adopted rules that prevented some subprime borrowers from being able to tell that they could not afford  their loans.  Housing the CFPA within the Fed would do little more than return to the status quo that permitted the Great Recession to happen.  It would create the illusion of reform without the reality.
 
The Treasury also failed consumers. When states passed anti-predatory lending statutes, a Treasury bureau, the Office of the Comptroller of the Currency, announced that the laws did not apply to the lenders it regulated.  The OCC also sued to block New York’s Attorney General from investigating whether national banks had violated state anti-discrimination laws.  The Supreme Court, in an opinion by Justice Scalia (not exactly known as a fan of consumer protection), ruled that the OCC had exceeded its authority.  Does anyone seriously believe that a department often led by bankers that has been so zealous in its protection of banks that it exceeded its powers will switch to protecting consumers?  No wonder CFPA-opponents want the CFPA within Treasury. 
 
If, at the end of the day, the alternatives are no CFPA or a CFPA within another agency, a CFPA within an agency would probably be better than no CFPA at all, but only if the CFPA has full autonomy within that agency. In addition, protections would be needed to insure that that autonomy cannot be infringed upon.
 
After 9/11, Congress realized that government could have done better.  Accordingly, it created the Department of Homeland Security and reorganized our intelligence apparatus.  We should recognize that the Great Recession calls for similar action and stop relying on the agencies and rules that failed us.  But because a powerful industry has an incentive to block such action and the issues are hard to wrap your mind around, we may end up with the same system we had before--and later, the same outcome.

Jeff Sovern is a professor of law at St. John's University School of Law and co-coordinator of the Consumer Law and Policy Blog.