Wednesday, December 19, 2012

House Oversight Panel Report Finds CFPB Cost-Benefit Analysis Deficient, While Praising SEC and CFTC Efforts

Citing improved cost-benefit analysis by the SEC and CFTC, a House Oversight Committee report found that the Consumer Financial Protection Bureau (CFPB) does not perform adequate cost-benefit analyses in its rulemakings. The report was released by Oversight Committee Chair Darrell Issa (R-CA) and Rep. Patrick McHenry (R-NC), Chair of the Financial Services Subcommittee. The funding was part of a broader Committee concern around the CFPB's lack of accountability. The report noted that, fortunately, other independent financial regulators have relevant experience in improving their cost-benefit analyses.  The CFTC signed a memorandum of understanding with the White House Office of Information and Regulatory Affairs (OIRA) to review its cost-benefit analyses. The SEC likewise recently implemented improved cost-benefit analysis practices after receiving criticism about its approach to rulemaking from many observers, including the Committee. The SEC’s new guidance ensures that decisions are informed by the best available information about a rule’s likely economic consequences; involves economists at the earliest stages of developing rules; and requires economists to concur in the economic analyses.

The CFPB, however, remains unconvinced.  Despite calls for action to ensure the Bureau’s cost  benefit analyses are rigorous and complete, noted the report, the CFPB has given no indication that it would consider enhancing its own cost-benefit procedures.

The report also noted that the CFPB’s unnecessarily aggressive processes prevent the Bureau from adequately considering how its enforcement and regulatory actions could restrict access to and increase the cost of credit.  Unlike other prudential regulators, the CFPB has assigned lawyers to its examination teams, which in turn has caused financial institutions to retain additional lawyers as well.

While it has vast powers, observed the report, the CFPB lacks some of the most basic institutional and external  controls that would provide much needed oversight to the agency.  Unlike other independent financial regulators, including the SEC and the FDIC, the CFPB is run by a single director instead of a bipartisan or nonpartisan commission. The CFPB Director serves a five-year term and can only be removed for inefficiency, neglect of duty, or malfeasance in office. Unlike some other agencies, the CFPB is not subject to annual congressional appropriations, and its regulations are not subject to stringent interagency review by the OIRA, within the Office of Management and Budget (OMB). According to the Committee, these structural deficiencies allow the CFPB to be a rogue financial regulator with the unmatched potential to create uncertainty for providers of consumer financial products and services

With these concerns in mind, Chairman McHenry wrote to Mr. Cordray in July 2012 withquestions about the CFPB’s commitment to regulatory independence.  In response to this oversight, the CFPB produced to the Subcommittee an email in which the White House overtly sought to use the CFPB to further the Obama Administration’s policy objectives. 

The Dodd-Frank Act empowers the CFPB to prevent “unfair, deceptive, or abusive” financial services or products. Because the statutory definition in the Dodd-Frank Act is ambiguous and the CFPB has repeatedly declined to interpret it, said the report, there is tremendous uncertainty about how the CFPB will apply the “abusive” standard in practice. During his testimony before the Subcommittee in January 2012, Mr. Cordray refused to offer a clear definition of  “abusive,’’ declaring that it will be a fact and circumstances determination.