CFPB | Danny Vinik

As a fan of the Consumer Financial Protection Bureau (CFPB), I am very happy that Richard Cordray will almost certainly be confirmed as its legitmate head later this evening. It took Majority Leader Harry Reid (D-NV) almost deploying the nuclear option in the Senate, but it appears that Cordray’s nomination will overcome a filibuster and that he will be confirmed as the agency’s first director.

So, why did it take so long for his confirmation? Not because he isn’t qualified. Republicans have no qualms about his qualifications. What Republicans have objected to is the agency itself. A letter to President Obama on February 1st this year signed by 43 Republicans outlined their concerns. They are as follows:

Establish a bipartisan board of directors to oversee the Consumer Financial Protection Bureau
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Subject the Bureau to the annual appropriations process, similar to other federal regulators
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Establish a safety-and-soundness check for the prudential regulators

After today’s vote to proceed to his nomination, Senator Chuck Grassley (R-IA) complained that “we don’t have adequate checks within the bureaucracy.”

Well, the last few days demonstrate why Dodd-Frank created a single director for the agency and not a board. Just look at the National Labor Relations Board (NLRB). The Board currently has just three members and on August 27, when Mark Pearce’s term expires, it will be unable to hold a quorum and thus will have no power. Without Reid’s willingness to invoke the nuclear option, the GOP would have continued filibustering all NLRB nominees, effectively rendering the agency useless. Is that what Democrats want to see happen to the CFPB? Of course not!

Having a board of directors instead of a single director has its own advantages. More voices at the top of the agency can prevent it from acting outside its purview or not enforcing strict enough regulations. But it also slows the agency down with more people at the top. It would also require multiple confirmations to function. The GOP could confirm a couple of nominations and just filibuster the rest to prevent the agency from operating. As of today, that should be a thing of the past with the agreement between the two parties never to filibuster executive nominations again. But up until today, Democrats did not just fear that the GOP would obstruct the agency this way; they knew it would. Republicans can appeal to change it now that there is an agreement on filibusters, but they still must demonstrate why a board is better than a single director for the CFPB.

The CFPB also has to report on its actions and appear before Congress. It is subject to an annual audit by the Government Accountability Organization (GAO). It’s also monitored by the Inspector General for the Federal Reserve Board of Governors. Republicans want a dedicated Inspector General for the agency. Fine by me. I’m not sure why Democrats blocked the amendment earlier this year, possibly out of anger over Republication obstructionism over Cordray. Now that he’s confirmed, Democrats should relent and allow the agency to have its own IG.

How about subjecting the budget to the annual appropriations process? This one is easy: Hell No! Republicans’ favorite way to prevent agencies from using their full powers is to reduce or eliminate their funding. House Republicans have repeatedly voted to slash the Commodity Futures Trading Commission’s (CFTC) budget even as the agency has taken on a greater regulatory role after the passage of Dodd-Frank. The Securities and Exchange Commission (SEC) has seen its budget cut as well. Neither agency has near enough money to compete with the seemingly endless cash from Wall Street. Why would Democrats allow the same thing to happen to the CFPB? The agency receives a maximum of 12% of the Federal Reserve budget. It’s not unlimited and if it wants more funding, then it must ask Congress for it.

As for the safety-and-soundness check, Mike Konczal explains it better than me:

There is already a safety-and-soundness check at the OCC, which, through the Financial Stability Oversight Council, can vote on vetoing CFPB actions. It’s not clear why this is important to Republicans. A cynical reading would be that since profit-making is one way to achieve the safety and soundness of banks that the CFPB regulates, anything that might get in the way of banks ripping off their customers would hurt safety and soundness. And, indeed, big fines and settlements for illegal practices do, in theory, mean more capital that they’ll have to raise, or lower earnings for shareholders. But aren’t such fines and settlements how we provide accountability to the financial sector?

The FSOC can veto any CFPB action if it endangers the “safety and soundness of the United States banking system or the stability of the financial system of the United States.” That’s a pretty good safety-and-soundness check. If Republicans really want to interpret such a check so that any rule cannot reduce the profits of banks, that’s ludicrous. Otherwise, I’m not sure what they want. The Bureau must already “consult with prudential and other federal regulators during rulemaking regarding prudential, market and systemic objectives.”

So, it’s a happy day for CFPB-lovers out there. The agency will finally have a legitimate head without giving into Republican demands. Democrats should agree to install a dedicated IG for the Bureau and let the agency function as it was designed from here on out. It’s about time it had its full powers.

For one of my classes this semester, I have to write a blog post by 5pm each Sunday on the readings for class. Unfortunately, the blog is private so I can’t just link over to it, but I think my last post is worth re-posting here (my first two posts weren’t as insightful). As I wrote the post, I discovered how truly messed up our system is. In a way, everyone has an incentive to create a bubble in the housing market – until it pops of course. It’s a massive tragedy of the commons. Everyone does what is best for themselves and everyone is hurt in the end. It’s a big reason why we need regulators who’s livelihoods are unrelated to housing market and thus can provide neutral, effective oversight to prevent such a bubble. It’s certainly a very difficult problem and one that we haven’t solved yet.

Here’s the full post:

This week’s articles focused on the sub-prime mortgage crisis and the rampant fraud throughout the mortgage lending industry. For me, this is the most infuriating aspect of the entire crisis – everyone is to blame from lenders to borrowers to the government.

As Binyamin Appelbaum, Lisa Hammersly Munn and Ted Mellnik document in their series “Sold a Nightmare,” and Michael Hudson reveals in his piece on Countrywide Financial Corp., mortgage lenders participated in a number of fraudulent and unethical activities that eventually lead to a huge rise in foreclosures. Borrowers themselves were not blameless either. Many took on loans they knew they could not afford.

However, one aspect of the sub-prime mortgage crisis that has been overlooked is the government’s involvement in it. Here is where we find an incredible number of poorly aligned incentives that significantly contributed to the crisis.

Let’s look at incentives from a general level: Politicians want to be reelected and to attain higher office, and they do so by pleasing their constituencies. What’s one way for them to please their constituencies? Make houses more affordable and available. In fact, this may be the single best way for politicians to make their constituents happy. After all, one of the most crucial aspects of the American Dream is homeownership. Politicians have a huge incentive to promote homeownership.

And across the country, we saw lower less government oversight and a rise in government-insured loans. This, in itself, is not necessarily a bad thing. The problem is once again with incentives. Government-insured loans incentivize lenders to create loans as quick as they can, ignoring borrowers’ income, credit and ability to repay their loans. When the government insures loans, lenders have no default risk on those loans.

Now, certainly, the government was not promoting fraud here. If the program had been successful, more low-income individuals would have received loans, some of whom would have defaulted. The government would have eaten the cost of those defaults but this was the acceptable tradeoff of increased homeownership amongst low-income individuals. Continue reading “Misaligned Incentives in the Housing Market” →

Danny Vinik

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The CFPB Has Adequate Checks

Misaligned Incentives in the Housing Market