The Consumer Financial Protection Bureau, attacked since before it was born and facing a court challenge to its structure, may be dealt a death blow by the incoming Trump administration.
As an important consumer protection agency and the first domino in a line of regulatory agencies about to be pushed over by the deregulatory army heading to Washington, the CFPB needs to survive for the public good and your investment future.
I’ll be showing you how fixing it and not killing it can make regulatory regimes across the U.S. more effective, less intrusive and profitable for you.
Fighting the Good Fight
Senator Elizabeth Warren (D-Mass.) has been constantly under attack over the Consumer Financial Protection Bureau ever since she was a law professor at Harvard University calling for the creation of the CFPB. She has continued to receive criticism in her role as Special Advisor for the CFPB when it was being written into the Dodd-Frank Act, and as the CFPB’s biggest cheerleader since her election as a Senator in 2013.
A lot of Republicans and deregulatory zealots have attacked Warren and the CFPB as examples of government overreach.
They’re not all wrong. There’s a lot about the CFPB that needs to be fixed, in spite of all the good the Bureau has done.
Born out of the financial crisis that imploded banks betting the wrong way on “no-doc” and “liar loans” in subprime mortgage-backed securities and other egregious big bank money-grabbing schemes, the CFPB (part of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted 2010) set new standards for the mortgage market and establishes necessary consumer safeguards.
The Bureau’s new rules make it mandatory that lenders verify borrowers’ income and their ability to repay loans. Rules now make it harder to push exotic mortgages, including ones with “teaser” interest rates. Regulations are now in place simplifying the disclosures that borrowers receive when they take out a loan.
Last year the CFPB forced Citibank to pony up as much as $700 million in compensation to customers after accusing the giant bank of tricking consumers into buying unwanted credit card “add-ons” like identity-theft protection. In 2014, CFPB extracted a similar amount for similar violations perpetrated by of Bank of America.
The Bureau has also gone after student loan servicers for overcharging beleaguered student borrowers, taken down credit card companies for charging undeserved fees, challenged payday lenders on their practices, and looked into lots of corners and dark rooms where consumer fleecing schemes may be residing.
By the CFPB’s own tally, it’s generated more than $11.7 billion in “relief” for more than 27 million consumers.
It’s even taken on the entire securities industry by proposing a set of rules prohibiting arbitration clauses in brokerage agreements that prevent class action lawsuits.
In addition to writing new rules, the CFPB also has the authority to enforce those that are already on the books.
And that’s where the Bureau ran itself into a wall.
The Bureau’s Bad Move
In 2014 the CFPB initiated a lawsuit against PHH, a New Jersey-based mortgage lender, claiming they illegally accepted kickbacks from mortgage insurers. The case was heard by an administrative judge who found PHH guilty and ordered a small sanction of $6.4 million.
That’s when CFPB Director Richard Cordray took matters into his own hands, imposing a penalty of $109 million. Critics of Mr. Cordray’s were furious at the overreach. The case was appealed.
Last October the U.S. Court of Appeals for the District of Columbia said Mr. Cordray’s interpretation was incorrect and the CFPB “violated bedrock due process principles,” by applying its interpretation of the law retroactively.
The PHH verdict brought into question whether a statute of limitations applied to the CFPB’s enforcement effort was illegal. The CFPB’s position, according to the Wall Street Journal is, that “Congress didn’t set a time limit for bringing administrative proceedings.” The Appeals Court said the three-year limit applies to enforcement of the alleged kickback violations and that the CFPB didn’t have a right to punish alleged conduct that took place before then.
But the most damaging aspect of the Court’s decision was its position on the very structure of the Bureau.
Title X, the section of the Dodd-Frank Act that sets forth the Bureau’s formation, says a director will be appointed by the President, confirmed by the Senate, and the Bureau then has the ability to “administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance.”
However, the Appeals Court’s opinion calls for the CFPB to be given presidential oversight, with a sitting president able to supervise, fire, and direct the head of the CFPB.
The current law only permits the president to remove the director for “inefficiency, neglect of duty, or malfeasance in office.” The Court found that clause to be unconstitutional, saying it relied on flawed reasoning that “[n]ever before has an independent agency exercising substantial executive authority been headed by just one person.”
Critics allege agency’s incorrect and egregious enforcement actions amount to a “bureaucratic end-run around the formal rule-making process-in effect, an unauthorized extension of the agency’s reach that can’t be fought via the usual political channels,” according to the Journal.
The Ugly Future of Over-Deregulation
President-elect Donald Trump’s campaign rhetoric about reducing regulations now puts the CFPB squarely in his deregulatory army’s sights. There’s no easier target to take down in the world of regulatory organizations than the CFPB now that a Federal Court has thrown it to the mat.
Taking down the CFPB is an opportunity for the new administration to show it means business.
But that would be the exact wrong message to send to the American people.
First, it wouldn’t be easy to tackle the Bureau and try to eradicate it. The pushback from the public would taint the new administration immediately and set up a battle royale, not unlike the one President Obama faced over the Affordable Care Act.
What the new president should do is publically support the good work the CFPB has done, admonish it for its overreach and establish appropriate checks and balances for its’ funding and oversight. Subjecting the Bureau to bi-partisan review makes sense, even though whichever party has control of Congress could exert their influence over the agency.
But that’s no different than any other aspect of government and makes sense historically and constitutionally.
How the administration handles the CFPB at this juncture of its life will be an indication as to how the rest of the regulatory regimes, with their prudent protections and sometimes obvious overreach will be streamlined or stalemated.
The American public shouldn’t be for more regulation, we should all stand for transparent, prudent, simple black and white regulations that safeguard us appropriately, punish lawbreakers quickly and severely, and clear a path for economic growth at the same time.
If we see the new administration streamline regulations while maintaining necessary protections, the investment landscape will look a lot smoother a lot sooner. If the wholesale slashing of necessary regulations becomes the order of the day, they’ll be plenty of time to make money in the new Wild West, and even more time to ponder the destruction that would cause when markets implode again from too many schemers fleecing the public again and again.