Journalism in the Public Interest

Will Innovative New Financial Regulator Be Hobbled Before It Even Starts?

The Consumer Financial Bureau is web-savvy and willing to experiment. But will Congress strip it of crucial powers?

These heat maps show two model mortgage forms that the Consumer Financial Protection Bureau posted on its website to illustrate the number of comments generated by each part. (Photo courtesy of Consumer Financial Protection Bureau)

Want to know what people find most confusing about mortgage disclosure documents? Then check out these heat maps created by a new government regulatory agency.

The heat maps show two model mortgage forms that the agency posted on its website. Users left more than 13,000 comments on the documents, and the maps show which parts of the form generated the most comments—which may indicate, among other things, which parts are the most difficult to understand.

This more inclusive approach to regulation is one of the hallmarks of the new Consumer Financial Protection Bureau, a politically contentious agency that will open for business this Thursday.

The agency is trying to draw in consumers, since one of its jobs is to make sure that consumers understand the financial deals they're making. It has a candy-colored website that looks more like a social media start-up than a cluttered .gov page. It turned to Twitter for a pre-launch "Open for Suggestions" campaign and then posted response videos on its YouTube page.

"Its openness thus far suggests the tantalizing possibility that it could be the nation's first open-source regulator," New York Times personal finance columnist Ron Lieber wrote last week.

Created as a result of last year's financial reform law, the agency is supposed to be a "cop on the beat" overseeing consumer financial products such as mortgages, credit cards and payday loans.

But just how effective the bureau will be is still in question, in large part because of a partisan battle on Capitol Hill over how much power the agency should have to police banks and other financial institutions.

As part of a wider attack on last year's Dodd-Frank legislation, a group of Republican legislators have promised to block the bureau from operating fully unless its ability to police businesses is put under bipartisan control.

Republicans want to replace the bureau's director—nominated by the president—with a five-member bipartisan board. They also want to make it easier for the bureau's rules to be overturned, while some are also demanding that Congress be given control over the bureau's budget.

Republicans have promised to filibuster the appointment of the bureau's director (the nominee is former Ohio attorney general, and Jeopardy star, Richard Cordray) until their demands are met.

Like many other news outlets, the financial news service Bloomberg lambasted the changes in an editorial on Tuesday, saying it would politicize the agency and make it slower.

The bureau "was designed to move quickly (like the Federal Deposit Insurance Corp.) and not ploddingly (like the SEC, where three commissioners must pre-approve nearly everything the agency does)," Bloomberg opined.

At the moment, the bureau gets its funding from the Federal Reserve. This is a good thing, Bloomberg concluded, because it means the bureau is "insulated from the partisan funding fights that have hamstrung the SEC, the Commodity Futures Trading Commission and other regulators."

It's worth noting that the Republican-controlled House Appropriations proposed a budget that gave the SEC $222.5 million less than requested for 2012. (It made this recommendation even though cutting the SEC’s budget will not affect the deficit, since the SEC is funded not by taxpayers, but by fees levied on the Wall Street entities it regulates.)

The bureau's opponents aren't backing down. Forty-four Republican senators have signed a letter vowing to oppose the confirmation of any agency chief until the new regulator is restructured. On Tuesday, a key Republican senator described Cordrary, the current nominee, as "dead on arrival." President Obama could bypass this issue by pushing the director through in a recess appointment. (The Senate's current recess is on hold due to debt ceiling negotiations.)

Until the bureau has a confirmed director, its regulatory powers are limited in significant ways. As the Los Angeles Times has noted:

The agency won't have power, for instance, to crack down on mortgage brokers, some of which helped lead the nation into the housing debacle four years ago. It also won't have authority over other largely unregulated sectors of the financial services industry, such as payday lenders and remittance companies such as Western Union, that it was created to police.

But as the political battle rages on and media scrutiny focuses on Elizabeth Warren's political future, little attention has been given to what the bureau has actually done. And its initial efforts are interesting, especially because they show a commitment to open government and real public engagement. (Ron Lieber noted that its blog actually accepts comments—"unlike, say, the White House's.")

The bureau's mission is to create transparency in an industry dominated by confusing claims and mouse print. Good design isn't just a perk here—it's fundamental to the bureau's regulatory efforts.

Case in point: One of the CFPB's top priorities has been streamlining the federally required mortgage disclosure documents. If that sounds like a mouthful, it's worse on paper: two separate, complicated forms that are confusing for customers and, the bureau contends, also burdensome for many mortgage servicers to fill out.

The goal is to replace them with a single, two-page document that clearly answers the questions: "Can I afford this mortgage?" and "Can I get a better deal somewhere else?"

Two of the potential designs for the new form each have a note at the top, in bold print: "You have no obligation to choose this loan. Shop around to find the best loan for you."

The bureau's other projects include improving transparency about credit card prices and fees, the exchange rates used for remittance transfers of money to other countries and the credit scores sold to consumers and creditors.

It's worth noting that, while the financial industry has lobbied heavily against the bureau, its efforts may actually help businesses in the long run.

In a recent letter to shareholders JP Morgan Chase's chief executive, Jamie Dimon, noted that the company does not oppose the bureau. "If the CFPB does its job well, the agency will benefit American consumers and the system," Dimon told shareholders. "Strong regulatory standards, adequate review of new products and transparency to consumers all are good things."

New Yorker financial columnist James Surowiecki has argued that the financial industry should see the creation of a bureau as a boon, not a threat. "Meatpackers hated the Meat Inspection Act of 1906, but it rescued the industry from the aftereffects of the publication of ‘The Jungle,' " Surowiecki wrote. "At a time when Americans profoundly distrust the financial industry ... [the CFPB] could turn out to be the friend banks never knew they needed."

Correction (7/22): This story incorrectly stated that the House Appropriations Committee had cut the Securities and Exchange Commission’s budget by $222.5 million. While the committee has proposed the cut, it has yet to be enacted.


July 20, 2011, 4:20 p.m.

The premise is that the agency will benefit the public. This is false. People need freedom, not further regulation. The free market is the best regulator.

I am a little at a loss to know which is better.

This Consumer Financial Protection Board will not be under the Congress, so this could be a great advantage to be out from under all the politics.

However, the CFPB WILL be under the FED, the banks, which have been at the core of much financial corruption.  So I am not sure if this is going to be a real advantage.

Our political system has a way of screwing up everything…

Unless the objective is to aid a corporation or his lobbyist.  Lots of benefits happen then.

The Republicans have been instrumental in limiting or actually cutting funding for those regulatory agencies that might impact their friends and donors on Wall Street, in bank and just the wealthy. The SEC, the IRS, to name just two have been prevented from enforcing existing laws via funding restrictions. The sole aim has always been to limit who might be audited or prosecuted and those are always the targets among the corporate and financial sector as well as the well to do who have bank accounts off shore and fail to file honest income tax returns.
  We can also ask whether Greenspan, who misjudged the financial sector’s instruments did so as a matter of firm judgment or because he was indulging those companies for maximum profit from which he too could benefit.

Yes, yes, more freedom. 

Freedom to rip off the U.S. treasury and the taxpayers to support the banks and the financial mobsters who have raided us through our well lobbied Congress.

Yes, yes steal from us some more; and then the Congress can cut social security and medicare, because, of course, no big money comes to Congress from anyone representing the retired people of the U.S.

Yes, freedom to steal, steal, steal, steal, steal…

jch, sf bay area

July 20, 2011, 7:21 p.m.

a freer free market? mr. shellenberger, perhaps you’ve recently awakened from a coma ala austin powers; you should bring yourself up to speed. these last few years, much has become clear, even to the somnabulant american public.

Shellenberger, did we not just go through one of the worst economic debacles in US history thanks to the rabid, deregulated, unbridled financial sector?  Do the words bail out bring anything to mind.  Fed rescue to the tune of 12 trillion in loans and guarantees?  Nothing?  Forget it.  Go back to eating brains and moaning.

While I’m not a big fan of laisser faire economics, Shellenberger isn’t entirely wrong.  The way the financial system and regulations were set up allowed the financial industry to take such tremendous risks knowing that if they happened to fail, the government would just bail them out.  The game is riged.  The U.S. is run by corporate America.  Privatize profits and socialize losses right?  My solution, get rid of big government and get rid of privatization!  Democracy through and through, politically and ECONOMICALLY!

Margret Brady

July 21, 2011, 7:24 a.m.

The lack of regulation has resulted in the largest scale corruption in centuries. Every American except the top 1% now in control, has lost equity, savings and value in their investments as a result. How bad does it have to get before the free market people take their heads out of the sand and face the facts.

Article:  “As part of a wider attack on last year’s Dodd-Frank legislation [6], a group of Republican legislators have promised to block the bureau from operating fully unless its ability to police businesses is put under bipartisan control.”

There was a time when someone might take this as a serious proposal.  However, the modern GOP with its Randian “purity pledges” and shopworn trickle-down rhetoric masquerading as reality, renders this one dead on arrival.

Niko posted:

Yesterday, 11:34 p.m.
While I’m not a big fan of laisser faire economics, Shellenberger isn’t entirely wrong.  The way the financial system and regulations were set up allowed the financial industry to take such tremendous risks knowing that if they happened to fail, the government would just bail them out.

That’s not the same as saying that deregulation and the free market is the answer.  That concept is ludicrous.  See the S&L scandal, the Enron scandal, the energy scandal (for which California is still paying) etc.  Before every one, some law, regulation or rule was relaxed by state or federal legislators and the results were inevitable.  I agree with what you are saying in as much as regualtion without enforcement is the same as having no regulation at all.  It would be like putting up speed limit signs but cops never handing out a ticket.  Pretty soon everyone would be driving at whatever speed they wanted to.

Regulate - Financial I’m sure that’s just what they want.  It will never happen.  It’s an illusion

jennifer henry

July 26, 2011, 5:04 p.m.

I think people have a small view of what has been going on.  Pensions have been underfunded since George W. was talking a lot about tort reform, throwing everyone off track in 2003.  That was when instead of telling people the expected 10%-12% domestic equity returns necessary to support our current public pension plans (cops, teachers, firefighters, etc.) was “dead.”  There was no way to make the returns necessary to continue to pay everyone their benefits with the regulations that existed at the time.  Pensions had strict investment guidelines and oversight committees designed to keep risk within them at bay.  When Greenspan de-fanged Ms. Warren and then the Fed lending rate was pushed to zero, an inverted yield curve in the fixed income market resulted, regulations had been so relaxed, it was the invitation for the crash.  Oversite was taken away and risk was allowed into the penions in more than one way.  Risk also wound its way into every conceivable corner of the markets in the form of (among other things)  the sub-prime mortgages that were disguised through the use of “tranches”—credit default swaps were very popular among other vehicles designed to DISGUISE risk, rather than mitigate it, as they vehemently claimed.  If stronger regulation had been in place, this massive infiltration of crummy investments could not have risen to the pinnacle they did.  It’s not JUST sub-prime lending.  It isn’t only the concept of regulation.  Our entire economic system is interwoven with the reality that the people who made the world we live in today, did not count on growth in domestic equity to dry up.  Now we basically have a Ponzi scheme hanging out waiting to dry up before my generation gets to benefit from it at all.  And the weight of professional investment management has been given to individual citizens, who are uniformed, and kept that way, through the concept of the Defined Contribution plan.  Any investment professional will tell you the information given to a consumer is not sufficient for them to make a quality decision about their retirement funds.  Elizabeth Warren is under attack again, b/c she actively engages in educating to populace to know what used to be strictly for insiders.

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