Who is the CFPB Really Protecting?

“A vast bureaucracy with no congressional oversight, that’s digging through hundreds of millions of your credit records to detect fraud,” proclaimed former Republican Presidential Candidate Carly Fiorina in regards to the Consumer Financial Protection Bureau (CFPB).  She went on to declare, “This is how socialism starts, ladies and gentlemen.” Ted Cruz referred to it as “a runaway agency that does little to protect consumers.” Chairman of the House Financial Services Committee, Jeb Hensarling, declared that the CFPB “undoubtedly remains the single most powerful and least accountable federal agency in all of Washington.”  The CFPB, controversial since its creation in 2010, is currently in the crosshairs of congressional Republicans. The Party, notorious for preaching the reduction of the scope of the federal government, has used strong language to contest the agency’s attempts to reign in misconduct in the financial industry.  In addition to disagreeing with the agency in principle, Republicans have recently attacked the agency’s excessiveness, lack of accountability, and poor functioning.  While consumer protection is vital, this agency provides a dangerous amount of control to a federal agency that has repeatedly overstepped its boundaries.  Both parties are increasing their affection for the small business, but ultimately crushing business to protect the consumer.

The CFBP was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in an effort to protect consumers from the irresponsible and predatory actions of big banks. By educating consumers, enforcing laws, and studying financial markets, the agency fills in the holes between seven other consumer protection agencies that have similar purposes.  Since its founding, supporters claim that the CFPB has many successes, including protecting consumers from high interest loans on mortgages, reducing foreclosures, providing home loan counselors, additional appraisers for mortgages, student loan interest inspection, and punishment for unfair bank practices.

One major function of the CFPB is to regulate lending practices such that the circumstances that led to the “Great Recession” don’t happen again.  In the years leading up to the recession, many banks eased the baseline requirements needed for people to take out loans. As a result, people were given loans to buy homes they could not afford. In 1990, an average of 20% of the total sale price was needed as a down payment for a house, whereas in 2005, only 3% was required. When interest rates on those loans increased, many people could not afford to make their mortgage payments.  Mortgage defaults reached a historic high, homes flooded onto the market, and property values went down. Banks that had made many of these loans (or purchased bundles of these risky loans) could not recoup their investments because housing prices were too low. Some banks became financially unstable and needed to be bailed out by the government. The CFPB was created to try to prevent similar behavior on the part of banks so that individuals wouldn’t end up going bankrupt after purchasing a home they couldn’t afford and taxpayers wouldn’t have to bail out any more banks.

While some might argue that the CFPB’s increased oversight and regulation of banks is a positive development, Republicans disagree, arguing that this agency has excessively burdened the market. The CFPB’s increased regulation, they say, is strangling smaller community banks and preventing people with lower credit scores from being able to get a loan.

One example of this is the CFPB’s efforts to strengthen regulation on small dollar loan requirements, despite existing state regulation. Those with lower credit scores generally take out small dollar loans in emergency situations.  By enacting federal regulation on top of state requirements, the CFPB is excessively interfering in a market that often benefits those of low socio-economic status. Such measures are unfair and fail to accomplish the purpose of the CFPB: the large banks that are most often held responsible for the financial crisis are not hindered by such regulations at all because they rarely issue small-dollar loans and have large departments to aid in compliance with new regulations.  Additionally, Cordray is trying to pressure big banks to offer these loans more abundantly, which could put smaller lending agencies that thrive on providing payday loans in trouble. Instead, the people hurt by this regulation are not those who caused problems, but are instead facing financial ruin because they can’t get the loans they need from smaller financial entities.   A recent study by the Urban Institute, “Small Dollar Credit: Protecting Consumers and Fostering Innovation,” notes that most people seek small dollar loans due to a “family emergency or a temporary, unexpected cash shortfall.”  However, higher barriers to this borrowing market might drive lenders out of it, and force those searching for small dollar, emergency loans to disastrous ends.

Republicans are also troubled by the lack of influence they can have over the operating procedures of the Bureau. Because it’s a branch of the Federal Reserve, it is more independent than most arms of the government. Every year, the CFPB is authorized to spend up to 12% of the Fed’s budget, which comes to about $600 million each funding cycle.  And since its funding comes from the Federal Reserve’s budget rather than from appropriations from Congress, it is less susceptible to congressional control. This insulation is intentional, isolating the agency from big banks and interest groups who have significant influence over Congressional politicians, but Republicans argue that this isolation is dangerous.

Without being dependent on legislators and ultimately citizens, there is nothing preventing the agency’s bureaucrats from fulfilling personal agendas.  Prominent legal critics, such as Brendan Soucy of Florida State University, find substantial issues with this independence.  Soucy says “independence is touted as one of [the CFPB’s] greatest virtues, but history has shown that while independence from political pressure can be a virtue, near total isolation is not.”  Republicans are weary of an institution that would curtail banks without the banks’, or their own, interests in play.

Proponents of the CFPB argue, however, that the agency is not entirely free of Congressional oversight.  The CFPB is required to submit annual financial reports to Congress, testify in front of Congress twice a year, and is subject to annual compulsory audits from the Government Accountability Office.  Additionally, Congress does have the ability to eliminate the bureau through legislation, an action that Representative Hensarling has been attempting to see through since the Bureau’s creation. Hensarling has stated, however, that the CFPB is “capable of great good.”  He is concerned, principally, with the single director structure that could allow for the head of the Bureau to overstep the position’s designated powers with few repercussions.

The Bureau’s detractors become even more concerned when considering the way in which the CFPB’s chairman was appointed. Senator Elizabeth Warren (D), who originally pushed for this agency’s creation, was initially considered but Republicans advocated against her nomination to the post. As a result, President Obama nominated Richard Cordray to be the chairman, but Republicans again opposed this appointment. After failing to push the nomination through Congress but arguing that the vacancy had to be filled, Obama used a  recess appointment to name Cordray the head of the CFPB.  Republican legislators disliked the use of executive authority to circumvent the nomination process and view the chairman with a dose of skepticism as a result.

Furthermore, the bureau recently attempted to regulate the automobile industry, despite the industry’s exemption from CFPB power.  According to Dodd-Frank Section 1029, the CFPB cannot regulate automobile dealers engages in the sale and servicing of motor vehicles.  Nonetheless, the Bureau has tried to enforce the Equal Credit Opportunity Act in the automobile industry, which is intended to prevent discrimination in loan provision.  However, in doing so, they are overstepping their afforded powers.  The jurisdiction of this agency is sloppy: it has powers to enforce some laws, but in doing so it defies different restrictions on its jurisdiction.  (Perhaps this is the result of too many federal regulatory agencies.) The House voted 332-96 to enact “The Reforming CFPB Indirect Auto Financing Guidance Act”, which would officially bar the CFPB from interfering in auto financing disputes.  Furthermore, House Republicans argue that the CFPB not only lacked authority to regulate this industry, but that its reasoning for doing so was unsound and statistically inaccurate – dangerous tendencies for an extremely independent agency.

In March, Chairman of the House Financial Services Committee Jeb Hensarling put forth a plan that would be offered as a conservative’s alternative to Dodd-Frank.  It would give smaller banks eased financial regulations in exchange for holding more capital.  Hensarling asserts, “If a bank chooses to have a fortress balance sheet that protects taxpayers and minimizes systemic risk, then bankers ought to be allowed to be bankers.”  This, he claims, would give banks the opportunity to lend to whomever they felt fit, while ensuring the bank’s stability through its forced maintenance of high levels of capital.

Bernie Sanders and Ted Cruz seem to agree on one point: big banks are not helpful to the economy.  Sanders’s “Too Big to Fail, Too Big to Exist Act” proposes that banks that could not fail without destroying the economy are too powerful and should therefore be broken up. Cruz insisted that “big business is a natural ally of big government” and as a Republican, he shouldn’t support businesses that require government regulation. Both miss the mark: big businesses cannot be opposed or left to crumble, as they are the pipelines through which massive innovative feats have occurred.  In protecting the consumer, destroying big business is not the answer.  If it were not for the breadth and resources of Amazon, consumers would not benefit from two-day shipping, and in some cases, two hour shipping. If it were not for Apple, consumers would not have a device that performs for them thousands of functions for them, from a flashlight to video calling with friends, to checking stock price instantly.  Big businesses have created a more advanced and more informed consumer.  They have increased the possibilities for a freer market and a more capable citizen body.  The goods of big business and corporations, however, are being confused with the unscrupulous financial practices of a few; these few unfortunately had ruinous effects on the economy as a whole and have given efficient and productive business a bad name.

While the financial crisis of 2008 had cataclysmic effects for individuals as well as the general health of the economy, the CFPB is an uncurbed and misdirected source of regulation in an economy that already struggles to keep up with existing regulations.  While this portion of the Dodd-Frank Act attempted to fill in the holes of existing regulation, it actually created many ambiguities between financial institutions, the industries they support, and government regulators.  In issues such as the Automobile Finance debacle and regulations on payday lending, the CFPB has a dangerous tendency to overstep its bounds.