At a March 23 hearing, “The Future of Housing Finance,” conducted by the House Committee on Financial Services, Illinois Republican Judy Biggert criticized HUD’s Office of Federal Housing Enterprise Oversight in its former role as Freddie and Fannie’s safety and soundness regulator. She then questioned the wisdom behind creating a Consumer Financial Protection Agency and if such as agency should be responsible for both regulation and safety and soundness.
Treasury Secretary Timothy Geithner responded that “we are now living with the consequences of a system that “for many, many decades, gave bank supervisors the responsibility to write and enforce rules for consumer protection and that system did a terrible job for the country.
“It did a terrible job protecting consumers, and it did not to an adequate job in protecting safety and soundness of the banks in our country.
“There was failure in both those areas, and our judgement is that you’ll get better outcomes in consumer protection, and better outcomes in safety and soundness supervision if you separate those functions.
Geithner went on to note that he’s heard the argument for unified oversight of consumer protection in the form of a Consumer Financial Protection Bureau (CFPB) and safety and soundness supervision from bankers, and that “there’s not a strong argument” for it:
“Look at what that system produced: a colossal and devastating failure. Why should there be any conflict between rules designed to give consumers adequate disclosure so they can make choices of what type of mortgage product to take and rules designed to enforce sound and underwriting standards for consumers.
Consumer protection, he concluded, is best conducted by an independent agency. He also defended GSEs like Fannie and Freddie and their roles in creating standardized mortgage products and that they were held “generally” to better underwriting standards than were in the private market.
This exchange came only a day after the Senate Banking Committee voted — along party lines with Democrats in favor — to send a financial reform bill to the full Senate for debate. Despite the party line vote, and despite the move earlier this month by Committee Chairman Chris Dodd (D-Conn.) to conclude bi-partisan efforts in crafting a bill, particularly with Republicans Bob Corker of Tennessee and Richard Shelby of Alabama, the bill appears to have some Republican support in the full Senate.
Shelby said among the Republican concerns was to mitigate the so-called moral hazard of banks, and those “too big to fail” to avoid future taxpayer bailouts. Though that assertion, while presented by Shelby as a “concern” for Republicans, is clearly of interest to both parties, for political and economic purposes, otherwise, what’s the point of consideration of any agency?
Though, politics aside, there are other, more legitimate concerns with the bill, including the bill’s opaque definition of “abusive” when it comes to lending practices. A CFPA can also waive oversight, according to the bill, of non-bank agencies; moreover, according to HousingWire, special waivers can be granted to licensed real estate brokers, accountants, lawyers, and more.
In the advocacy world, one major point of contention is the proposal to establish a new agency within the Federal Reserve, rather than charter it as a freestanding oversight agency with enforcement power. Criticism of this feature is not hard to find, but John Taylor, president and CEO of the “National Community Reinvestment Coalition recently and succinctly characterized the bill’s placement of the CFPB at the Federal Reserve, as “more of a waste of taxpayers’ money because we’ll have to pay for the appearance of protection without getting any.”
Tough stuff. Too much regulation from the right; too little from the left. And what’s in the middle? Something that’s probably not toothless, but without a lot of bite. And the Fed? Well, Chairman Ben Bernanke told the House Financial Services Committee last week that he doesn’t want to see the central bank turned into the “too-big-to-fail regulator.” In fact, “we don’t want that responsibility,” he said amid concerns that the Senate proposal would take the Federal Reserve’s eyes off the small- and medium-sized banks.
The new proposal, according to The New York Times, would “leave the Fed with responsibility for about 35 bank holding companies, each with $50 billion or more in assets, about 4,900 smaller bank holding companies and 850 state-chartered banks that are members of the Fed system would become the responsibility of other regulators.”