The Federal Financial Forum

By: J.P. Freire
Associate Commentary Editor
10/27/10 9:05 AM EDT

Authority over the Consumer Financial Protection Bureau is vested in a director not just by presidential appointment, but also by Senate confirmation, but nobody told that to Elizabeth Warren who is working with the Federal Reserve to establish new mortgage disclosure rules on behalf of the Consumer Financial Protection Bureau. The problem? She’s not really supposed to be doing that.

Somebody needs to tell these people that working with Congress to regulate the market is a feature, not a bug, of democracy:

The new Consumer Financial Protection Bureau can’t begin flexing its rule-writing muscle, cracking down on things such as tough-to-understand mortgages, until it gets a Senate-confirmed director.

But the Federal Reserve can.

Treasury has reached out to the Fed to discuss how the two can work together to help the bureau meet some of its tough rule-writing deadlines, people close to the situation told CNNMoney.com.

It’s not clear, yet, if the Federal Reserve would actually write the rules for the consumer bureau. But agency officials are talking about it.

By leaning on the Fed, the bureau could meet its one-year deadline for issuing rules revamping mortgage disclosures, while effectively sidestepping critics who have questioned the bureau’s rule-making authority because it lacks a confirmed director.

Uh, it’s not just that it lacks a confirmed director. President Obama made Elizabeth Warren a special adviser to Treasury secretary Tim Geithner in order to forgo what would have been a messy confirmation hearing, meaning that Warren hasn’t testified before the Senate about what she’d like to do with at the CFPB. Full stop. She is not the director. She is an adviser to the Treasury secretary, which only has interim authority to “perform the functions of the Bureau … until the Director of the Bureau is confirmed by the Senate in accordance with section 1011.” It’s hard to think that Congress intended for this to happen indefinitely.

And what’s section 1011 say anyway? That the director of the CFPB is “appointed by the president with the advice and consent of the Senate” for a term of five years, meaning that it’s currently the Headless Horseman of the marketplace. In fact, only the director of the CFPB can delegate authority, and further, that the statutory requirements CFPB has to fulfill can pretty much only be fulfilled by the director.

Now, prior to the “transfer date,” the various agencies that will eventually merge into CFPB can continue making rules and conducting business. The Office of Thrift Supervision will still be doing its Thrift Supervision. And if Geithner wants to make a few tweaks, he’s within his own rights.

It even makes perfect sense to want to have one person making tweaks in these offices and making the initial moves toward establishing Bureau (like working with the Fed). But this person is supposed to be the Senate-confirmed director, not some installed-person-we-won’t-refer-to-as-a-czar-just-because-it’s-an-unpopular-title.

The moment you specifically hire somebody to be a de facto head of a new agency, and have that person establishing the way that the new agency is going to be working with other arms of government, you’re violating the spirit, if not the letter, of the law, and undermining the authority of the new agency.

These are the very people people charged with clarifying tough-to-understand mortgages and writing rules for the finance industry, and they’re already finding loopholes “just to make things easier.” That’s chilling.

Why? Because Dodd-Frank goes out of its way to explain how the director will go about establishing how CFPB will work. From appointing a board of governors to establishing different offices, the director is supposed to design a functioning Bureau — just do a word search in the legislation using the words “the director shall establish within the Bureau” and see what comes up. The point is that somebody inside the Bureau is supposed to engineer how it works, and that this person needs to be confirmed by the Senate. Too bad if that’s inconvenient for Obama’s agenda: Congress made that the law, and Obama signed it.

Now imagine if it’s somebody other than Elizabeth Warren coming into the position of director: Congratulations, all of that authority Congress gave you is relatively moot because all the things that you were supposed to do to establish the Bureau as an effective force are made much more difficult by the fact that Elizabeth Warren has already done it. Maybe she did a good job because she believed in it. Maybe she did a bad job because she wasn’t inside the organization. Whatever the case, it’s her mess, and now you’re cleaning it up.

It doesn’t matter whether or not the industry is fine with Warren working with the Federal Reserve to deal with mortgage disclosure, there’s still the matter of good management and of checks and balances.