Pending CFPB Battle Dominates Dodd-Frank Hearing

WASHINGTON — Although a Senate Banking Committee hearing on Tuesday featured testimony from top officials at six different financial regulators, it was an agency not in the room that drew the most attention.

Lawmakers on both sides of the aisle spent a chunk of the hearing trading jabs about the upcoming vote this week on the nomination of Richard Cordray to head the Consumer Financial Protection Bureau.

Republicans sought to portray the vote, which they plan to block, as a political stunt, while Democrats accused the GOP of subverting the political process.

Sen. Bob Corker, R-Tenn., one of the lawmakers being targeted this week in a White House campaign to blame Republicans for obstructing the CFPB nomination, blasted a top Treasury official at the hearing.

"I'm sort of surprised that you all continue to be a part of this political game that's taking place," Corker said in comments to Deputy Treasury Secretary Neal Wolin.

Later, Sen. Richard Shelby, who is leading the charge to stymie Cordray's nomination unless the Obama administration agrees to make structural changes to the agency, pressed the issue further. He asked whether the White House is going to pick up the phone to begin talks with Republicans.

"Are you guys seriously interested in negotiating with us?" Shelby asked Wolin.

Wolin responded, "Well, I think, Senator, what we're very interested in is the Senate considering Richard Cordray."

The verbal exchanges, which came during a hearing about the work regulators are doing to implement the Dodd-Frank Act, further hardened the impression that neither side in the CFPB impasse is likely to budge anytime soon.

It was a point reinforced by comments Tuesday from President Obama, who once again slammed Republicans for refusing to allow a vote on Cordray.

"Everyday we go without a consumer watchdog in place is another day when a student, or a senior citizen, or member of our Armed Forces could be tricked into a loan they can't afford — something that happens all the time," Obama said in a campaign speech in Osawatomie, Kan. "Consumers deserve to have someone whose job it is to look out for them. I intend to make sure they do, and I will veto any effort to delay, defund, or dismantle the new rules we put in place."

During the hearing, Democrats were eager are eager to portray the Republicans as obstructionist.

"It's time for the Senate to understand something about majority rule," said Sen. Robert Menendez, D-N.J. "A bipartisan majority of the United States Senate voted for the Dodd-Frank Wall Street reform law. Part of that law is the Consumer Financial Protection Bureau. It needs a director. It needs a director to ultimately level the playing field."

Sen. Sherrod Brown, D-Ohio, who lauded former Ohio attorney general Cordray as the perfect person for the job, accused Republicans of holding the nomination hostage.

"This is the only time in American history where one political party has blocked a nominee because they don't like the makeup of the agency," Brown said. "They don't agree with the existence of the agency so they block the administrator for the agency, and that just doesn't make sense.

But lawmakers and regulators also touched on plenty of other hot-button topics during the hearing. Other notable discussions included debate on:

The Volcker Rule

In response to questions from Democratic Sen. Jack Reed, Federal Reserve Gov. Daniel Tarullo suggested that lobbying efforts by the banking industry to weaken the rule, which places restrictions on proprietary trading, could have the unintended consequence of resulting in stricter capital requirements for banks.

Tarullo said that in the absence of restrictions on proprietary trading, regulators would need to look at the potential losses associated with proprietary trading when they are setting capital requirements.

"Obviously, if a firm is able to take on a substantial portfolio of risky assets, capital requirements will have to be higher," Tarullo said.

Gary Gensler, chairman of the Commodity Futures Trading Commission, which did not join other regulators that recently issued proposed regulations to implement the Volcker Rule, suggested that there is no significant disagreement behind the split.

"I would envision that we would move forward with a proposal consistent with what other regulators have done," Gensler said.

Bank Capital Requirements

Tarullo faced questions about the level of bank capital from senators concerned about the health of banks in Europe.

"Since the beginning of 2009, our 19 largest institutions have accreted or raised approximately $300 billion in capital, more than a 40 percent increase in what was held beforehand," Tarullo said.

"I don't think any of us would discount the possibility for difficulties in the United States if there were severe problems in Europe, but I do think that at the core, which is to say the capital and liquidity positions of our large institutions, we've made a lot of progress since the beginning of 2009."

Sen. Kay Hagan, D-N.C., pointed out that the problems in Europe have exposed flaws in current international capital rules, since sovereign debt held by European banks is currently less liquid and worth less than the rule-writers anticipated.

Tarullo responded that the Basel committee, which sets international capital standards, needs to learn from the experiences of the last several years, and that's what it's doing.

"And what I have thought was that the 2008 period gave us a very good real-life experiment to test what kinds of instruments actually do remain liquid even during a period of stress like that," Tarullo said. "For example, highly traded equities of large companies."

Mortgage Underwriting Rules

Echoing complaints from many Democratic and Republicans, Menendez expressed strong concern about a proposed exemption from a risk retention requirement.

Specifically, Menendez was concerned about a requirement that borrowers make at least a 20% down-payment in order to meet criteria for the so-called "qualified residential mortgage."

But John Walsh, acting comptroller of the currency, did not commit to loosening the terms of the QRM regulation.

"It is one of the issues we have to confront," Walsh told Menendez. "But it's not intended to define what an acceptable mortgage is. It's intended to define an exception from the broader rule."

Housing Finance Reform

Corker's complaints about the Obama administration were not limited to the rancor over the CFPB. He also went on the attack over the administration's failure to present a plan to phase out and replace Fannie Mae and Freddie Mac.

"I am surprised that you have not come forth with any solution towards the GSEs," he told Wolin. "I mean, it's a pretty basic issue that all of us know needs to be dealt with."

Wolin said that the administration has been working on the issue, but he declined to commit to a timeline for putting forth a concrete plan.

"You have not taken on GSEs as you said you would," Corker retorted. "You came out with a multiple choice that makes everybody happy, and you did not do what you said you would do."

Whistleblower Protections

Mary Schapiro, commissioner of the Securities and Exchange Commission, said that since her agency finalized rules for a whistle-blower program, which it was required to do under Dodd-Frank, it has received hundreds of tips.

"We already are reaping the early benefits of the whistleblower program through active and promising investigations, utilizing crucial whistleblower information, some of which we expect will lead to rewards in the near future," Schapiro testified.

The Money Missing at MF Global

Gensler, whose agency is investigating the disappearance of customer funds at bankrupt commodities trader MF Global, came under repeated attack by Republican senators — part of an ongoing chorus of criticism by members of the GOP in recent weeks.

Gensler, a one-time colleague at Goldman Sachs of former MF Global chief executive Jon Corzine, faced pointed questions from Republicans about his decision to recuse himself from the investigation.

"It feels to me like you panicked," Corker said, "and it was more about a career- enhancing situation to avoid accountability."

Gensler explained his decision to recuse himself by saying, "I just didn't want to be a distraction because I had been at the same firm and he had been my boss."

After the hearing, a reporter asked Gensler whether he felt like he was being unfairly attacked, since some Republicans in Congress called on him to recuse himself, and then when he did, other GOP members have criticized the decision.

In response to the reporter's question, Gensler simply smiled and largely repeated the answers he gave during the hearing.