Sunday, January 23, 2011

Treasury and Fed Respond to Chairman Bachus’ Request for Information on new Bureau of Consumer Financial Protection

Responding to a request for transparency from House Financial Services Chair Spencer Bachus, Treasury and the Federal Reserve Board indicated that the new Bureau of Consumer Financial Protection plans to have three mission-related directorates: Education and Engagement; Supervision and Enforcement; and a Research, Markets, and Rules division with three components: a research team that studies consumer behavior and product risks; a rulemaking team that drafts rules, interpretations, and guidance; and a markets team that focuses on understanding and monitoring markets for individual products, such as mortgages, credit cards, and student loans. The Bureau implementation team also plans to include an Office of Small Business and Community Banks within the Bureau’s organizational structure.

Section 1066 of Dodd-Frank authorizes Treasury to perform the functions of the Bureau until the first Director of the Bureau is nominated by the President and confirmed by the Senate; and Treasury may provide administrative services before the designated transfer date, which Secretary Tim Geithner has set as July 21, 2011. President Obama named Professor Elizabeth Warren as Treasury Special Advisor on the Consumer Financial Protection Bureau.

Responding to a specific request from Chairman Bachus that Bureau officials study the organizational changes that the SEC and other federal financial regulators made in response to criticisms in the wake of the financial crisis, Professor Warren assured the Chair that she will ensure that lessons learned from other regulatory agencies are considered as the Bureau sets its enforcement priorities.

In his November letter to Treasury, Chairman Bachus also said that he wanted to see more transparency and accountability in the process of establishing the new Bureau, adding that, in sharp contrast to the approach taken by the SEC and CFTC in implementing Dodd-Frank, Treasury had provided little or no transparency in its activities implementing the Bureau for eventual hand-off to the Fed, where it will reside.

In the response letter to Chairman Bachus, Treasury officials said that the organizational plan is a “work-in-progress,” and that the Bureau implementation team expects to continue modifying the plan going forward. Treasury officials also stated that the Bureau implementation team’s draft budgets for FY 2011 and FY 2012 will be included in the President’s FY 2012 request, which traditionally is released at the end of January or beginning of February.

The Bureau implementation team expects that the three directorates will work together to ensure that policy initiatives are tailored to identified problems and that any policy initiatives that affect consumer risk, affordability, and access are appropriately estimated. Treasury officials stated that the Bureau of the Public Debt’s Administrative Resource Center (ARC) will provide the Bureau with financial management services to ensure that financial systems and processes comply with federal laws and regulations. The Bureau implementation team is in the process of developing the Bureau’s policies and procedures and determining whether to continue using ARC or implement a different financial management system after the transfer date.

According to Treasury and the Fed, the ongoing independent oversight provided by the Inspector Generals is another means for safeguarding against waste, fraud, and abuse within the Bureau’s programs and operations. Additionally, the new Bureau will be subject to external oversight by Congress and the Government Accountability Office is responsible for conducting an annual audit of the financial transactions of the Bureau. For its part, the Bureau is required to provide GAO with an assertion as to the effectiveness of its internal controls for financial reporting.

The letter assured Chairman Bachus that the Treasury Secretary is not authorized to prescribe rules under the Bureau’s rulemaking authority prior to the designated transfer date. Until that date, rulemaking authority under federal consumer financial law remains with the federal regulatory agencies that currently have such rulemaking responsibilities. In addition, since the Secretary is not authorized to prescribe rules prior to the designated transfer date, reasoned the federal officials, the Secretary cannot delegate this authority.

However, if confirmed by the Senate, the Director of the Bureau is granted a limited amount of rulemaking authority prior to the designated transfer date. While the Secretary is not authorized to prescribe rules prior to the designated transfer date, Treasury is considering whether it will issue advance notices of proposed rulemaking (ANPRs), which, according to Treasury, do not contain substantive rules, but are a means of gathering information and input, before the transfer date.

According to Treasury officials, the Bureau implementation team is also using informal channels, including public forums and meetings with industry representatives, to collect information regarding the Bureau’s rulemaking considerations. In addition, the Bureau implementation team intends to include a page on the Bureau’s website, which should be launched by the end of January 2011, where the public can provide its input on any number of topics relating to the Bureau.

Professor Warren and the Bureau implementation team are in the process of identifying priorities for rulemaking proceedings to be undertaken after the designated transfer date. Professor Warren believes that cost savings, improved regulatory compliance, and simplified consumer disclosures are among the factors being considered in establishing the rulemaking priorities. In addition, Professor Warren and members of the team have met with staff from the financial regulators that will be transferring rulemaking authority to the Bureau in an effort to better understand existing regulatory priorities.

Professor Warren has informally collected public input through meetings with industry representatives and consumer groups. In addition, according to Treasury, Bureau officials are continuing to meet with members of the public to obtain input with respect to rulemaking priorities. The Bureau also intends to collect public input on rulemakong through its website.

Similarly, the Treasury Secretary is not authorized to conduct supervisory examinations prior to the designated transfer date. Until that date, consumer compliance examinations may be conducted by the regulatory agencies that have examination authority under current law. However, during the interim period, the Secretary may exercise the Bureau’s authority to have Bureau examiners participate (on a sampling basis) in the current regulators’ compliance examinations of depository institutions with total assets greater than $10 billion, and any affiliate thereof. In addition, if nominated by the President and confirmed by the Senate, the Director is authorized to conduct supervisory
examinations of nondepository institutions prior to the designated transfer date.

The Bureau implementation team is developing plans, policies, procedures, and staffing levels for the Bureau’s enforcement function. While the Bureau has not yet established priorities for enforcement activities that will be undertaken after the designated transfer date, the recent hiring of implementation team leaders for enforcement and nondepository and depository supervision will enhance the priority-setting process.