By Yuka Hayashi 

WASHINGTON -- Is the Consumer Financial Protection Bureau a hero or a laggard in the probe into Wells Fargo & Co.'s sales practices? It depends whom you ask -- and the answer digs into the heart of the controversy over government regulators' role in the post-financial-crisis era.

Democrats say the CFPB's enforcement action against Wells Fargo shows the five-year-old agency needs to be strengthened to protect consumers from what they see as harmful industry conduct.

Republicans, meanwhile, are using the scandal to build their case for overhauling the CFPB's operations, saying the agency's slow action on Wells Fargo showed its incompetence. They are pressing federal regulators to explain why it took several years for them to uncover the widespread problems at Wells Fargo, while praising Los Angeles officials for initiating the investigations.

The political fight over the CFPB is set to intensify over the coming weeks, as Senate Republicans plan to vote soon on legislation curbing the bureau's unusual independence. Unlike most other agencies, the CFPB doesn't have to get approval from Congress for its budget, which is funded by fixed fees from the Federal Reserve. The GOP wants to change that; the Democrats have vowed to oppose such a step. Republicans also want to revamp the agency's structure, making it run by a commission instead of a single chief, arguing CFPB Director Richard Cordray wields too much power.

CFPB officials have said the bureau's structure was designed by Congress under the 2010 Dodd-Frank financial-overhaul law.

The CFPB imposed a $100 million fine on Wells Fargo for allegedly opening as many as two million accounts without customer consent -- by far the biggest fine in its history. Wells Fargo also has to pay a further $85 million to other regulators. The bank didn't admit or deny wrongdoing in settling the case.

Many industry executives worry the Wells Fargo case will result in more regulations coming from the CFPB and support the GOP efforts to change the agency's structure and budget process.

"This is going to make needed structural reforms at the CFPB very, very difficult to get through, if not impossible," said Camden Fine, president and chief executive of the Independent Community Bankers of America. Mr. Fine said he expects new pressure to create rules on cross-selling of products and executive compensation, two areas at the center of the Wells Fargo case.

The House Financial Services Committee, led by Jeb Hensarling (R., Texas), is holding a hearing on the Wells Fargo case on Sept. 29, where Republican lawmakers are expected to look closely at the roles played by the federal regulators in the investigations. The Senate Banking Committee held its own hearing on Wells Fargo on Tuesday.

"Chairman Hensarling has always said we are going to hold both Wall Street and regulators accountable. We are going to do our job," said a spokesman for the House committee.

Questions remain about when each regulator got involved in the case and how they interacted with each other and with Wells Fargo. Testifying before the Senate panel on Tuesday, James Clark of the Los Angeles City Attorney's Office said that agency started its probe after a December 2013 Los Angeles Times article about the bank's sales culture but didn't contact federal regulators until it filed a lawsuit against the bank in May 2015.

Meanwhile, Wells Fargo Chief Executive John Stumpf told Tuesday's hearing that the bank notified the Office of the Comptroller of the Currency about the problems the bank had found in 2013 but didn't tell the CFPB until 2015. Comptroller of the Currency Thomas Curry said his agency became aware of some of the problems in 2012.

Mr. Cordray, testifying at Tuesday's hearing, said the bureau had been investigating Wells Fargo on "a number of fronts" after receiving whistleblower tips in 2013.

Both the CFPB and the OCC have supervisory authority over Wells Fargo, along with other agencies, including the Federal Reserve and the Federal Deposit Insurance Corp. The CFPB looks at treatment of consumers, while the OCC focuses on the overall soundness of the institution. Industry experts say rivalries between agencies sometimes keep them from working together effectively in enforcement activities.

Fed Chairwoman Janet Yellen said Wednesday that the central bank would look at the "compliance, risk management and oversight" of bank holding companies in the wake of the Wells Fargo settlement. Ms. Yellen said the settlement didn't necessarily mean that Wells Fargo was "too big to manage," but said that the Fed expected banks to have "robust" systems of risk management to prevent issues like those uncovered at the lender. Those standards are "not impossible" for firms to meet, she said.

The debate comes at a critical time for the CFPB. It is in the final stages of completing two new rules -- one targeting the payday-loan industry and the other regulating arbitration clauses in financial contracts -- amid fierce industry opposition. The bureau is awaiting an imminent federal appeals-court decision in a case filed by mortgage lender PHH Corp. that challenges its enforcement authority and the constitutionality of its single-director structure. Legal experts say the CFPB could face its first significant litigation defeat with the case.

--

Gabriel T. Rubin

contributed to this article.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

 

(END) Dow Jones Newswires

September 22, 2016 18:34 ET (22:34 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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