Student Loans: Some Issues to Consider

Although these are not the only aspects of student loan policy that will come up in the next legislative session, these issues will drive the discussion regarding student loans.

Student loan debt is being reported as the next big “mortgage crisis” and private student loan lenders will likely be receiving the same congressional attention that private lenders did during the mortgage crisis.  Although allowing students to declare bankruptcy on their student loans would likely cause a wave of bankruptcies, this policy will still be up for debate.  It could very well serve as a bargaining tool for reaching a middle-of-the-road legislative alternative.  A recent Consumer Financial Protection Bureau report on student loans will not necessarily be the impetus for a legislative fix, but it will serve as the foundation for scheduling hearings and framing the debate.

How these two issues are framed will depend on the outcome of the election.  It is hard to draw any true conclusions on what the policy will end up looking like but they will be major discussion points when developing those policies.

The veterans’ issue is a hot one right now for student loans and will continue to be regardless of the outcome of the elections.  As troops are returning, more and more are taking advantage of their educational benefits.  The Consumer Financial Protection Bureau has a specific office set up for identifying consumer fraud  perpetrated against veterans.  Holly Petreaus, General David Petreaus’ wife, leads that office and her focus as of late has been a revaluation of the veteran student loan process and the targeting of veterans for loans from unscrupulous private lenders.

Oversight of the Consumer Financial Protection Bureau

On Wednesday March 16, 2011, the House of Representatives Financial Service Committee’s Subcommittee on Financial Institutions and Consumer Credit held a hearing titled “Oversight of the Consumer Financial Protection Bureau.” Elizabeth Warren, the hearing’s witness, is currently serving as Assistant to the President and Special Advisor to the Secretary of the Treasury. She is tasked with helping to set up the new agency. The Consumer Financial Protection Bureau (CFPB) was created last year through the Dodd-Frank Wall Street and Consumer Protection Act of 2010.  The CFPB is described in Title X of the bill and is currently a part of the United States Treasury.  In July 2011 it will become its own independent agency.  This new federal agency was created, as Warren described, to be “a top cop on the beat for consumer financial issues.”  The hearing was filled primarily with partisan debate over key issues surrounding the CFPB.  Republicans opposed the initial creation of the agency and are now hoping to limit its funding and rulemaking authority.  Most Republicans consider the agency a government overreach and an unchecked threat to a strong and diverse economy.  On the other hand, Democrats argue that the agency will be able to look out for consumers; a group whose interests, they argue has often been overshadowed by large banks and lenders.

In her testimony and responses, Warren described the goals of the CFPB and the vision for what its role will be in the U.S. government and the U.S. economy.  She expressed that the CFPB will, as its first priority, ensure choices and prices are clear to consumers.  She stressed that the CFPB will not dictate what choices must be made available to consumers, but rather that they are clear and defined.  Furthermore, the law says that the CFPB cannot require a financial institution to provide any particular product. According to Warren, the CFPB will try to create more efficient systems and regulations for consumers and banks, specifically easing paperwork burdens on small and community banks.  As an example, Warren explained that one of the agency’s first jobs has been to merge two different mortgage forms that have an 80 percent overlap in content.  Other regulators have unsuccessfully tried to complete this task for 15 years.  Also, starting in July, the CFPB will take over regulating 18 different consumer protection authorities, which are currently under the jurisdiction of 7 different federal agencies.

Starting July, the CFPB will also begin to be funded by the Federal Reserve, which places the agency outside of the congressional appropriations process.  This was a large topic of concern in the hearing as many Republicans fear a lack of congressional oversight due to the agency having independent funds.  In his remarks, Chairman of the full Committee, Spencer Bachus (R-AL) cautioned that the CFPB could be the most “powerful agency” ever created.  Adding to Republicans’ anxiety regarding lack of oversight of the CFPB, is the fact that the agency will have one appointed executive director.  Representative Bachus added, “It’s not a commission.  It’s one single person, and it will regulate all providers of credit, savings, payment and consumer financial products and services.”  Republicans suggested that a board or a committee running the CFPB would be more appropriate, and ensure proper checks and balances on its rulemaking authority.  Furthermore, after the hearing, Representative Bachus announced he is introducing a bill to replace the bureau's single director with a five-member commission of bipartisan representatives.

Warren and Democrats in the hearing defended the CFPB from criticism regarding the agency’s leadership and funding.  Warren noted that the CFPB will be funded in the same way as other banking regulators, such as the FDIC.  Representative Carolyn Maloney (D-NY) explained in her opening remarks that the Dodd-Frank bill established the Financial Stability Oversight Council (FSOC). The FSOC is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.  It is made up of 10 members, they are as follows: the Secretary of the Treasury, the Chairman of the Federal Reserve, the Comptroller of the Currency, the Director of the Bureau of Consumer Financial Protection, the Chairperson of the U.S. Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration Board, and an independent member who is appointed by the President and confirmed by Congress. Most relevant to the debate in the hearing, the FSOC has the authority to nullify any rulemaking done by the CFPB through a 2/3 vote.  Warren went as far as to describe the Agency as the “most constrained and most accountable agency in government.”

In addition to the criticisms of the leadership structure of the CFPB, there was much discussion over Warren’s current role at the agency and her involvement in its construction.  In the hearing, Warren explained her role. She stated that prior to the appointing of an official director of the CFPB (who must be congressionally confirmed); the Secretary of the Treasury has the authority to appoint an assistant to help with the setting up of the agency.  Many Democrats voiced their desire to see Warren herself eventually appointed as the first director of the CFPB.  On the other hand, Republicans in the hearing pressed Warren on her current position, its legal authority, and also the delay in a director being named by the Administration.  Like others at the hearing, Representative Patrick McHenry (R-NC) used his questioning to ask about the validity of Warren's work in setting up the CFPB without having been confirmed as the director.  Republicans warned that the Administration’s delay in nominating a head of the CFPB while the construction of the agency and its eventual independence in July takes place, will have many negative consequences on the agency’s effectiveness and credibility.


Howard Schweitzer Speaks at Capital Roundtable Masterclass on Dodd-Frank

On Thursday, February 10, 2011, Cozen O’Connor Public Strategies Principal Howard Schweitzer was a panelist at Capital Roundtable’s Masterclass, “Private Equity Investing in Regional & Community Banks -- How Investors Can Thrive From the Surge in Consolidations.”  Howard spoke on a panel regarding Dodd-Frank that was focused on the Consumer Financial Protection Bureau (CFPB).  The panel also included the recently departed Minority Chief Counsel for the Senate Banking Committee, a consumer financial protection attorney, and an investment banker.

The panelists agreed that the CFPB is likely to decrease the profitability of regional and community banks and that uncertainty with respect to the CFPB’s future activity creates significant compliance and regulatory risk for financial institutions.  Although the CFPB has limited supervisory authority over banks with assets of less than $10 billion, rules promulgated by the CFPB will still apply to these smaller banks.  Several of the panelists highlighted the Durbin Amendment, which drastically reduces debit card interchange fees, as a prime example of a Dodd-Frank provision that may pose a significant risk to banks’ profitability.

Howard, the former Chief Operating Officer of the Troubled Asset Relief Program (TARP), pointed out the irony of Dodd-Frank creating significant regulatory uncertainty and potentially forcing small banks out of business, just a short time after TARP invested hundreds of billions of dollars to stabilize the banking sector and keep banks in business.  He further noted that while Dodd-Frank was passed in light of banks being “too big to fail,” it may have created a segment of banks that are “too small to succeed.” 

Cozen O’Connor Public Strategies will continue to monitor the CFPB as Treasury prepares to transfer the Bureau to the Federal Reserve on July 21, 2011.  For more insight on the CFPB, visit