What is the Consumer Financial Protection Bureau?

What is the Consumer Financial Protection Bureau?
by Outside

Congress is on the cusp of creating a new Consumer Financial Protection Bureau (CFPB) as part of the broader Dodd-Frank financial reform bill. What is this agency all about, what problems does it aim to solve, and how much did it get mangled as it squeezed through the congressional meat grinder? Let’s take a look.

The primary goal of the CFPB is to keep big banks and other players in the financial industry from taking advantage of the little guy. Harvard contract-law professor Elizabeth Warren is considered the mother of the CFPB. She likes to point out that “you can’t buy a toaster in America that has a one-in-five change of exploding, but you can buy a mortgage that has a one-in-five chance of exploding, and they don’t even have to tell you about it.” She wants the CFPB to do for financial products such as credit cards, mortgages, and student loans what the U.S. Consumer Product Safety Commission does for tangible products like toasters and power tools.

In 1980, a typical credit card agreement was one and half pages long. Today, it’s around 30 pages and filled with text so obtuse that only a lawyer can read it – and typically contains such hidden gems as a clause stating they can charge you whatever interest rate they want, whenever they want, for whatever reason they choose. And credit card agreements are child’s play compared to mortgage contracts. 

Elizabeth Warren also argues that if the CFPB had existed years ago it would have prevented much of what led to the financial crisis. As she often points out, this crisis got started one lousy mortgage, one family at a time. Each such mortgage was eventually sliced and diced and funneled into the financial market machine until collectively those mortgages made billions for the Wall Street banks – right up until their aggregated risk came home to roost. Ultimately, risky mortgages not only were bad for individual consumers, they destabilized the entire economy.

Regulators at the federal level have shown little interest or aptitude in protecting consumers. Perhaps this is because any federal consumer financial regulation that does currently exist is split between seven different agencies (Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, Department of Housing and Urban Development, and the Federal Trade Commission). This has created a system full of loopholes with lots of finger pointing and zero accountability. It also means there is not a single set of rules for, say, offering a mortgage, but rather varying rules depending on who is lending that mortgage – since  regulators are organized by regulated firms, not regulated products. This may be convenient for those firms, but it’s not good for us.

So what would the CFPB offer? Here are some specifics:

• One stop shopping: Consolidates and coordinates consumer financial regulation in a single place.
• Independence: Led by a director appointed by the president and confirmed by the Senate. It will have a dedicated budget that is not subject to the whims of the congressional appropriations process.
• Teeth: Writes consumer protection rules for all banks and other firms that offer financial services and products (i.e., mortgages, credit cards, student loans, etc). It has the authority to enforce those rules for banks and credit unions with assets over $10 billion, all mortgage-related institutions, and large non-bank entities such as payday lenders and student lenders. These rules could range from caps on credit card fees to ensuring mortgage borrowers receive clear and understandable information.
• Consumer input: Runs a national, toll-free consumer complaint hot line for reporting problems related to financial products and services.
• Protection from discrimination: Oversees enforcement of federal laws that ensure no one is discriminated against when they apply for loans and credit.
• Forced arbitration: Has the power to ban forced arbitration. Often hidden in the fine print of consumer loan and mortgage contracts, this approach to dispute resolution typically strips consumers of the right to file claims against such entities as Wall Street firms, and instead forces them into a private arbitration system that can be rigged against them.
• Preserves state lending laws: Allows states to continue to attack problems in their local markets

So the CFPB is a watchdog with teeth. However, thanks to heavy lobbying from the financial services industry, along with typical congressional wrangling, it’s not as strong as what President Obama originally proposed. Here are some compromises made to gain its passage:

• Agency vs bureau: Originally it was conceived as a standalone agency (CFPA). Instead, it will be housed as a bureau within the Federal Reserve. However, since Fed does not have authority over it (it will have its own dedicated budget and independent director), this is not a crippling compromise.
• Enforcement: While the CFPB will write rules that apply to all banks, it cannot enforce those rules for banks and credit unions with less than $10 billion in assets (which is most of them). It must instead rely on existing regulators for that enforcement. You know, the guys who dropped the ball last time around…
• Veto: A new Financial Stability Oversight Council can veto rules written by the CFPB with a 2/3 vote if they determine those rules would threaten the safety, soundness, or stability of the financial system. This nine-member council will be chaired by the Treasury Secretary and consist of reps from each of the seven existing regulators and one independent member.
• Car dealers: Apparently car dealers have pretty good lobbyists too, since somehow auto loans made by them are exempt from CFPB oversight. However, at least the Federal Trade Commission’s ability to set such rules was streamlined.  

So the CFPB is good, but it could have been better. Where does Elizabeth Warren stand on what Congress has produced? While disappointed by some of the compromises made, she backs the overall CFPB package, saying it “has the authority and the independence it needs to fix the broken credit market.”

Further information on the CFPB:

• Wall Street Reform: The Consumer Financial Protection Bureau
• House-Senate Committee Complete Negotiations of Financial Reform Legislation
• Center for Responsible Lending