Shaky start for Consumer Financial Protection Bureau

Rahm Emanuel, President Obama’s first chief of staff, famously opined that crises presented opportunities for government “to do big things” even in a sharply divided Congress. But when those “big things” aren’t backed by a broad political coalition, they may shrink when the crisis goes away.

That’s the challenge faced by the Consumer Financial Protection Bureau, a centerpiece of the law passed in the wake of the financial meltdown to tighten oversight of complex financial products and banks. The bureau was designed to take over consumer protection duties that had been parceled out among half a dozen financial industry regulators, which have been more concerned about companies’ solvency than their treatment of consumers. It also was empowered to create rules against unfair and deceptive practices by mortgage firms, payday lenders and other “non-bank” financial companies that weren’t covered by existing federal regulations.

The absurdly risky subprime mortgages that helped inflate the housing bubble should have made the need for a consumer-focused regulator abundantly clear. But the proposed bureau drew stiff opposition from the financial industry and its allies in Washington, who argued that the added layer of regulation was unnecessary and too costly. The compromise struck by lawmakers placed some unusual constraints on the new bureau: for example, it is the only agency whose rules can be vetoed by another regulatory body (in this case, a panel of financial industry regulators).

The law also barred the bureau from using some of its powers until after its first director was confirmed by the Senate, including its ability to ban the most abusive practices and adopt new rules for financial companies that aren’t banks. But some GOP senators now say they won’t allow a vote on Obama’s nominee (former Ohio Atty. Gen. Richard Cordray) until the law is changed to reduce the bureau’s independence and replace its director with a commission.

The impasse won’t stop the new bureau from enforcing existing law after it officially launches Thursday. It will, however, prevent the bureau from closing regulatory gaps that leave consumers vulnerable to predation by lenders that aren’t banks. It was easy to predict that a fight would ensue over whomever Obama nominated, so it would have been better had supporters of the bureau not left it so vulnerable to obstruction.

On the other hand, the extra “checks and balances” demanded by GOP critics could stop the bureau from adopting any rules that run counter to a financial company’s interests, making it as ineffective at protecting consumers as other regulators have been. Obama may wind up appointing the bureau’s first director while the Senate is in recess, a stopgap move that would prevent that person from being properly vetted by lawmakers but would at least allow the agency to start work on all of its assignments.