CFPB Faces More GOP Criticism, But Not Enough to Kill It

The Consumer Financial Protection Bureau is likely to survive recent attacks by the Treasury Department while other post-financial crisis regulations, such as requirements for stress testing and the Volcker rule, will likely see exemptions and allowances.

The independent regulatory agency was created by the Dodd-Frank act, which this year has so far survived an executive order from President Donald Trump and the House of Representatives' Financial Choice Act. The agency is responsible for returning about $11.8 billion to consumers, according to bureau data. Now, the CFPB's faces criticism from the Trump's Treasury Department, led by former Goldman Sachs (GS) executive Steve Mnuchin.

The CFPB has engaged in "regulatory abuses and excesses" and "hindered consumer access to credit, limited innovation, and imposed unduly high compliance burdens, particularly on small institutions," according to the department's June 12 report to the president.

The Treasury report recommended removing the CFPB's independence by broadening the grounds on which the president can fire the agency's director or altering the structure to a commission or board and making the agency's budget subject to control by Congress.

However, restructuring the CFPB would require the passage of legislation which, like the Financial Choice Act, would likely die in the Senate, where Republicans lack the filibuster-proof majority that would be needed to pass the legislation.

"The Democrats will strongly resist those portions of the Treasury report [related to the CFPB] and, ironically there will be a battle over whether the president can administratively modify a set-up created by an act of Congress," said Rosemary Fanelli, managing director and regulatory affairs strategist at Duff & Phelps.

Without the proposed freedom to remove the director at will, Trump will have to wait until July 2018 when current Director Richard Cordray's term expires to gain control of the independent agency.

Only one significant action to reduce the power of the CFPB is likely to happen - the recommendation to use the standard annual appropriations process to fund the agency rather than transfers from the Federal Reserve - according to Compass Point Research and Trading analysts Isaac Boltansky and Lukas Davaz, who rated the likelihood of the Treasury's proposals in June 13 notes. According to the analysts, it is "very unlikely" the Trump administration will be able to get through Congress a bill to repeal the CFPB's supervisory authority.

The legislative process will likely slow down revisions outlined in the Treasury's report that can't be implemented directly through regulations, wrote Goldman Sachs analyst Alec Phillips in June 13 notes.

However, Phillips said the back-and-forth on the issue may still produce passable legislation in the form of relief to small banks. He said Senate Banking Committee Chairman Senator Mike Crapo (R-ID) may be able to pass bipartisan legislation with some of the Treasury's recommended reforms.

"Changes to reduce regulation of small and community banks has the broadest support among any of the issues that the Treasury report raises, along with perhaps certain aspects of mortgage regulation," Phillips said. "While these are clearly important, many of these changes are apt to focus on administrative issues and may have a modest financial market impact."

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