Hensarling Plan Targets Banking Regulators’ Independence

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By Jeff Bater

Nov. 29 — The Consumer Financial Protection Bureau is far from the only banking regulator that would have its independence curbed by legislation likely to be a blueprint for any financial services overhaul in the next Congress.

House Financial Services Committee Chairman Jeb Hensarling’s Financial CHOICE Act bill would turn the Office of the Comptroller of the Currency into a five-person commission and subject it along with the Federal Deposit Insurance Corp. and the Federal Reserve’s non-monetary policy functions to the congressional appropriations process.

Hensarling would also require the banking regulators to submit proposed rulemakings to congressional review and cost-benefit analysis.

Shaking Up Consensus

These structural changes designed to make regulators more accountable would upend the long-held bipartisan consensus about allowing banking regulators “an important degree of independence” from politics, Justin Schardin, the Bipartisan Policy Center’s director of financial regulatory reform, told Bloomberg BNA in an e-mail. “That consensus is now on the table,” Schardin said.

The legislation approved by the House Financial Services Committee along partisan lines in September applies the same arguments used to change the CFPB’s structure, funding and rulemaking process and applies them to other financial regulatory agencies, Schardin said.

Hensarling’s bill adjusts the FDIC governance by calling for all five board directors to be nominated by the president and confirmed by the Senate. Currently, the five board members include the comptroller of the currency and the CFPB director; under Hensarling’s bill, the heads of those two agencies would no longer sit on the FDIC board.

A Republican bill summary says bipartisan bodies hold themselves accountable by engaging in “robust internal debate,” which results in better-informed policies backed by more and better evidence.

“Their bipartisan nature also helps guard against biased or extreme views dictating regulatory outcomes, and places a premium on consensus building,” the summary said. “Moreover, by having staggered terms for commissioners, agencies avoid the sudden or extreme policy swings that may occur when single directors change control of the agencies.”

Overcoming Resistance

A question is, whether newly emboldened congressional Republicans and President-Elect Donald Trump can overcome resistance from Senate Democrats.

“The Republicans are going to need some Democratic support of Dodd-Frank reform,” Morrison & Foerster partner Donald Lampe told Bloomberg BNA. “We expect the progressive Democrats to be very, very vocal in their opposition to this—perhaps even more vocal than they’ve been to date about Dodd-Frank reform,” Lampe said.

Sherrod Brown (D-Ohio), the Senate Banking Committee’s top Democrat, said in a statement to Bloomberg BNA that he “will push back against all efforts that dismantle the financial oversight agencies’ independence and ability to defend consumers against illegal practices.”

In a statement for a markup of the bill in September, Rep. Maxine Waters (Calif.), the House Financial Service committee’s top Democrat, criticized the plan for “subjecting all of our independent financial regulators to the Republicans’ dysfunctional appropriations process.”

Pros and Cons

Having one person run an agency, such as the OCC or the CFPB, has advantages and disadvantages, Schardin said.

A single-director agency head can get more done more quickly than boards or commissions, but a change in leadership can also result in whiplash as policy quickly moves in another direction, he said. And, historically, nominating and confirming a single-director takes a lot longer than members of boards or commissions.

“The financial crisis showed how important it is for these agencies to maintain some insulation from the political process. These agencies should be accountable, but also independent enough to allow regulators to make difficult decisions in a crisis, when even short delays in making decisions can inflict substantial damage on the real economy.”

Schardin said an accountability measure that could pass through Congress would be to give the Fed and the CFPB their own inspectors general and have each subject to nomination by the president and confirmation by the Senate. “Today, the Fed chair appoints their own inspector general, who oversees both agencies,” he said.

Some Old Ideas

Hensarling’s bill repackages ideas that have been floated in the past, including legislation that never made it beyond committee approval or House floor passage. Bringing the CFPB into the congressional appropriations process is an old GOP proposal that had little hope of passage into law with President Barack Obama in the Oval Office.

“There’s not an enormous amount that’s new in the bill,” Lampe said. The concept of congressional review of rulemaking, for instance, has been around more than a generation, he said. “I think that will prove controversial,” Lampe said. “I think there will be a lot more discussion. There are important separation of powers issues that will be debated and talked about.”

Lampe said cost-benefit analysis is controversial in that it can slow down rulemaking and that cost and benefit are in the eye of the beholder. Behind the reasoning for it is an expansion of the regulatory state, particularly surrounding financial services, that hasn’t been seen before to the same degree.

“I think what we’ve seen after the crisis is that rules have been put into place without cost-benefit, and we’ve seen that those bills have been very costly to the economy and not necessarily yielded the benefits that their proponents sought,” he said.

Daniel F. C. Crowley, a partner at K&L Gates, pointed out Congress always has the power to prescribe the manner in which regulations are promulgated and to overturn regulations through legislation.

“It is also important to keep in mind that the primary basis for judicial rejection of proposed Dodd-Frank regulations has been the determination that an agency acted in an arbitrary and capricious manner by failing to assess the benefits relative to the cost,” he said in an e-mail. “In other words, cost-benefit considerations are fundamental to the rulemaking process, including judicial review, and Congress is well within its authority to explicitly require consideration of such issues.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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