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Funding of New Consumer Agency Cloudy And Controversial

Published: Thursday, 15 Oct 2009 | 11:11 AM ET

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By: Albert Bozzo
Senior Features Editor

With a key Congressional committee moving on legislation creating a powerful consumer financial products watchdog, the agency’s vague and unusual funding structure is likely to draw greater scrutiny.

US Capitol Building with cash

“The whole issue of how it gets funded--how it fits into the appropriation process and whether taxpayers pay for it--all has to be worked out,” says veteran banking industry analyst Bert Ely of Ely & Company. “To what extent is it supposed to cover all its costs or produce revenue that exceeds its costs?”

Questions abound about the controversial agency, which was first proposed by the Obama administration in June and is meant to assume some of the existing regulatory responsibilities of the Federal Reserve as well as other entities.

And buried under the financing discussions is the fundamental issue of whether Congress is encroaching on the central bank's independence.

Unlike existing banking regulatory agencies, such as the Office of the Comptroller of the Currency, the CFPA will not be entirely funded by industry fees, known as assessments. It also wouldn't receive supplemental income via the normal Congressional appropriations process.

What’s more, who and what will be paying those assessment fees is still unclear.

The House Financial Services Committee discussion draft of the bill simply states “any person who engages directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service … or in connection with the provision of a consumer financial product or service, provides a material service….”

That casts a net beyond the typical financial sector.

“The thinking in part is to assess non-bank financial institutions,” said one knowledgeable Congressional source, ahead of the committee's markup Thursday. "Pay-day lenders, mortgage companies.”

Read the CFPA Bill

Mortgage companies are definitely in. Not only are their products specifically mentioned in the bill, but the industry has been vilified for its predatory lending practices, the subprime mortgage meltdown and its contribution to the foreclosure crisis.

Credit unions, say analysts, are very likely out. Credit card companies, given the recently passed credit card law, would presumably be in. But what about insurers?

It gets complicated because five bank holding companies (JPMorgan Chase [JPM Loading... () ] , Citigroup [C Loading... () ] , Bank of America[BAC Loading... () ] , Goldman Sachs [GS Loading... () ] and Wells Fargo [WFC Loading... () ] ) now regulated by the Fed are all in the mortgage lending and/or servicing business. Many banks also have credt card operations.

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“It becomes a huge issue: What industries, organizations are going to subject to it,” says Ely. “It also becomes very much of a cost-shifting exercise" in that assessment fees by other agencies may either be shared and/or diverted.

Nationally chartered banks, for instance, already pay assessment fees to the federal comptroller to cover safety-and-soundness exams as well as compliance activities. A similar arrangement exists on the state level. So would funding from the comptroller be diverted?

Given the lack of detail at this point—more than usual for massive legislation—it’s impossible to determine how many institutions would be covered, what the assessment rates would be and thus what percentage of the operating funds would be generated from that source.

On top of that, all institutions, apparently, will not be treated equally, which would presumably require additional criteria and metrics.

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Fees will be “based on the size and complexity” of a covered entity, the draft bill states, but also “its compliance record.”

That sounds punitive, say analysts, and “highly unusual”, according to one former Fed official.

Analysts say an unusually high amount of detail will seemingly be left to the new agency's director.

Fed Piggy Bank

Highly unusual certainly describes the agency’s other source of funding.

The bill states that each year the Fed's “Board of Governors shall transfer funds in an amount equaling 10 percent of the Federal Reserve System’s total system expenses (as reported in the Budget Review of the Board of Governors most recent Annual Report to Congress) to the [CFPA] Director for the purposes of carrying out the authorities granted in this title.”

That 10 percent presumably represents the Fed’s operating costs for supervision and compliance activities of its consumer division, a good part of which entails implementing and enforcing the Community Reinvestment Act, according to people familiar with central bank’s operations. (The new agency will be in charge of the CRA.)

Based on the most recent report, system expenses, excluding the costs of printing and transporting the US currency, totaled $3.37 billion in 2008. Some $3.45 billion was budgeted for 2009.

Ten percent of those levels amounts to $337 million and $345 million, respectively.

Yet, there’s no single line item in the budget review that fits the compliance description, making it difficult to extrapolate, and the Fed’s consumer functions are carried out by both the board and the regional banks, further complicating the issue.

The Fed did not respond to a request to break down its consumer protection functions, staffing levels or operating costs.

“It is pulling ten percent out of the hat,” says veteran economist David Jones, who has written several books about the central bank. “It’s sort of an artificial construct.”