A Fed-Housed, Self-Funded CFPA? Sold.

Politico says Dodd and Corker are close to a deal that would house the CFPA inside the Fed. The article also says:

Under this latest broad-brush proposal, the new consumer body would have a presidentially approved director, an independent budget and autonomous rule-writing authority, sources said.

Well, if that's true, then Democrats should say "done" as fast as possible. But I tend to doubt that the CFPA's rulemaking authority will be completely autonomous — Dodd's weekend proposal included a process whereby a prudential regulator could appeal a proposed CFPA rule to a Systemic Risk Council made up of all the different financial regulators. (Hilariously, this sentence from the Politico article was literally the last sentence of the article. "Oh yeah, by the way, here's the substance." Classic Politico.)



But here's why I think housing the CFPA in the Fed could be a very good deal — although I stress "could." (I originally posted this last night as a comment to Yves Smith's post, but I wanted to lay out the argument for housing the CFPA in the Fed here as well, because it wasn't obvious to me at first either.)



Ideally, the CFPA would be a self-funded, independent agency. The great benefit of that arrangement is that it would create an agency (1) whose sole purpose for existing is consumer protection (which is huge, because that means it’ll always find more consumer protection to do), and (2) which is relatively free of political interference. Housing the CFPA inside Treasury is sub-optimal because the Treasury Secretary is a political appointee, and the CFPA would likely not vigorously enforce consumer protection regulations under Treasury Secretary Phil Gramm. (Plus the CFPA could be de-fanged through the budget process.)



Housing the CFPA inside the FDIC would make the CFPA both self-funding and relatively free from political interference, but there’s a huge jurisdictional problem with that plan. The FDIC only has jurisdiction over commercial banks and thrifts, and one of the main purposes of the CFPA is to regulate all the non-bank lenders out there. (That’s the reason Shelby proposed putting it in the FDIC.) So an FDIC-housed CFPA is a non-starter.



The Fed, on the other hand, does regulate non-banks (through its consolidated supervision of bank holding companies). It’s also self-funding, and is the regulator most insulated from political interference, due to the 14-year terms of Fed governors, among other things. So if we set up a CFPA inside the Fed, we will have achieved the goal of having a self-funded regulatory body that’s relatively free from political interference. Now, I know what you’re going to say: “The Fed is institutionally biased in favor of the banking industry, and anyway, Alan Greenspan never would have allowed a strong consumer regulator inside the Fed!” And that’s true. But now we just have to insulate the Fed-housed CFPA, in its rulemaking and enforcement activities, from the Board of Governors. That can certainly be done, and in a much more subtle and less controversial way than just waging an “Independent CFPA or Bust!” campaign. We don’t need total insulation from the Board of Governors either, because if consumer protection is made part of its charter, then the Board won’t be as hostile to consumer regulation as it has been in the past.



Essentially, the idea would be to have the CFPA leech off of the Fed’s independence. If structured properly, it could be a really shrewd move. Seriously, you shouldn't write this plan off before we see it.