Can a CFPA Deal Preserve Accountability?

It has been a fairly consequential week in the ongoing debate around the future of financial reform. Sen. Dodd has been tasked to get a deal done that can pass the Senate and is actively engaged with Sen. Corker (R-TN). There are many moving pieces under discussion but one of the primary stickling points is the fate of the proposed Consumer Financial Protection Agency. You can read my issue brief on this proposal here.

Yesterday the New York Times had an editorial supporting the creation of the agency and justified this position by describing recent developments trying to reform the credit card industry:

“The Credit Card Accountability, Responsibility and Disclosure Act, signed into law last spring, was supposed to put an end to many of the deceptive practices that allowed credit card issuers to bleed customers dry. The most important provisions went into effect earlier this week, but credit card companies have already found ways to evade the law. Congress and federal regulators need to do a lot more.

For starters, that means creating a strong and flexible Consumer Financial Protection Agency that could react quickly to all-too-common scams and evasions. The bill that would create this agency has passed the House, but it is being stonewalled by Senate Republicans under heavy lobbying from the financial industry.”The theory behind the push to create a CFPA is that consumer concerns have never been considered on par with “safety and soundness” assessments performed by existing bank regulators and an independent and empowered agency is required to ensure meaningful protections become part of the financial services landscape.

The debate is now centering on how this agency would be structured and where it would be placed. Some reports have identified various compromises under consideration, including whether it could be housed within Treasury or could be incorporated as a division within a new authority that would also assess risk in the financial system.

Earlier this week, Michael Barr (Assistant Secretary for Financial Institutions at the Treasury Department) spoke to the Credit Union National Association and once again laid out the case. His remarks are worth reading in full but he makes several points worth emphasizing.

The first is that regardless of where this agency or division is placed it needs both a strong mandate and sufficient independence to act and carry out its decisions. This will be the essence of accountability.

The second point is that elevating consumer protections will ultimately strengthen and not weaken financial institutions. Here is his conclusion:

“A dedicated consumer financial regulator will help break the cycle of long periods of neglect followed by major changes in regulation on the downside of the credit cycle.  It will provide banks and credit unions a more predictable regulatory environment, which will help provide them more stable earnings and more certainty upon which to build their businesses.  In short, the CFPA will make banks and credit unions safer and sounder.”

 <p>So, is he wrong? If not, who is  against increased “safety and soundness” and why?</p>