Pearls of Wisdom: What Problem is Congress Trying to Solve in the Financial Services Act?


Pearls of Wisdom: What Problem is Congress Trying to Solve in the Financial Services Act?

Last week (7 July) the House of Representatives passed the Financial Services and General Government Act. This bill makes some changes to the Dodd-Frank Act, to address the major problem with the act that some members have observed.

Specifically, the House voted to deny funding of the Consumer Financial Protection Bureau’s (CFPB) proposed rules to rein in predatory payday lending. In reality, this is the first step by the House to dismantle the regulations that were created in 2009 to prevent the abuses of the previous decade which led to the financial crisis in 2007 and 2008.

Director of the CFPB Richard Cordray has been using the resources entrusted to him to try to accomplish consumer financial protection. The CFPB fundamentally operates differently than many other parts of the government - the major issue the House bill is trying to address.

Most parts of the government are supervised by the political arms. For example, the Department of Labor has written some rules to require people who give advice on how to invest your retirement account which they think is in your best interest. People in the financial advisor industry created a tiered campaign to explain to their congressional representatives how their industry works better when the advisors are allowed to give advice which they know is actually in the advisor’s best interest instead. Congressional representatives have required the Department of Labor officials to appear before them, have allocated their budget specifically disallowing them to pass their rule, and generally have been very active in their oversight of the Department of Labor.

The CFPB works differently. Because Senator Dodd and Representative Frank wanted the bureau to be more separate from the political parts of the government, the bureau gets its funding directly from fees which banks are required to pay.  The director does not serve at the pleasure of the president, can only be dismissed for cause, and the bureau has been generally designed to be independent of the political branches.

This is a major problem for (again, some) members of Congress. They do not like meeting with the constituents who would suffer from CFPB regulations (executives of payday-lending companies, or sub-prime mortgage companies, or used car dealers who make most of their income from finance charges, etc.) and telling them that they can not solve their problems.

They have proposed several changes to the Dodd-Frank law to address these issues:

  • End all funding of the CFPB, except for appropriations from Congress;
  • Replace the director by a commission, requiring members of both parties to approve any actions;
  • Forbid the CFPB to oppose mandatory arbitration (such as in credit card contracts);
  • Forbid the CFPB to oppose predatory lending to people buying mobile homes;
  • Forbid the CFPB to regulate payday lenders.

A majority of the House of Representatives believe that the problem that their constituents want them to solve is that wealthy financial services executives need to have more influence over the government. Elected officials are unavoidably more inclined to answer to organized efforts by a small number of financial services executives who have a vested interest in continuing to make money than to the many Americans trapped in debt who do not have the means to get in front of their elected officials.

I believe that the United States of America is the center of the financial world because of our strong regulatory system, not in spite of it. Making America safe for predatory lenders and fraudsters is the wrong thing to do, and will in fact do long term damage to the financial services industry. I do not believe that we should turn the regulatory calendar back to as it was ten years ago and help the financial services industry run a business model of trapping Americans into a debt cycle.

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