Charting a New Course for the Consumer Financial Protection Bureau
Last month, Richard Cordray stepped down from his post as the first Director of the Consumer Financial Protection Bureau (CFPB). The CFPB now has the opportunity to move in a new direction — one that respects constitutional limits, promotes a healthy and well-functioning financial system, and thereby benefits consumers.
The CFPB was established on two false premises: first that there were no consumer financial protections in place prior to the Dodd-Frank Act; second, that the CFPB was necessary to prevent a repeat of the 2008 financial crisis. Both assumptions deserve more careful examination.
The reality is that federal consumer protection statutes — such as the Fair Debt Collection Practices Act, for example — have been on the books for decades. In fact, many of the CFPB’s rules are simply recycled from previously published rules under the aegis of different federal agencies. Dodd-Frank itself implicitly recognizes this by vesting the CFPB with powers previously exercised by the Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Office of Thrift Supervision (OTS), and the Federal Reserve (the Fed). And that is to say nothing of the myriad other federal agencies involved in overseeing the financial sector, such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA), and the Office of the Comptroller of the Currency (OCC). Prima facie, it’s hard to see how adding to this alphabet soup was necessary to protect consumers.
What is more, states have long enacted and enforced consumer protection regulations. In my state of Oklahoma, we have a whole chapter of the statutory code dedicated to consumer protection and an entire title devoted to consumer credit regulations. The Consumer Protection Unit in the Office of the Attorney General also prosecutes violations of state and federal consumer protection law. Indeed, Dodd-Frank expressly acknowledges and preserves the continued role of states in protecting consumers of financial products. Despite this — almost as if to justify its existence — the CFPB has time and again attempted to impose duplicative regulations that undermine the careful balance of regulations the states have enacted.
The second false premise — that the CFPB is necessary to prevent a repeat of the 2008 financial crisis — is equally concerning. The most obvious problem with this claim is that the CFPB does not even deal with the real culprits of the 2008 financial collapse: the U.S. housing bubble, government agencies subsidizing and pushing poor-quality mortgages, and the undercapitalization of banks who took on these risky assets. The CFPB has nothing to do with regulating these sectors of the economy. The housing market was — and continues to be — regulated by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development, with the Fed being responsible for setting interest rates and establishing minimum cash reserve requirements.
So it’s unclear why there was a need to create the CFPB in the first place. Moreover, there are also severe constitutional defects in the agency’s structure. As I have written elsewhere, the CFPB unlawfully accumulates power in a single person, the agency director, who is insulated from almost all democratic accountability. Former Director Cordray illustrated his ability to thwart the Constitution with his last act, purporting to appoint the interim director on his way out the door. The idea that an outgoing bureaucrat can overrule the president of the United States in appointing a high officer of the executive branch is of course ludicrous, and courts have thus far rejected this approach. But ultimately, the courts (or Congress) will have to address the underlying unconstitutionality of the CFPB itself.
For now, the president has a unique opportunity to put the CFPB on a better course by appointing a new director, who will respect the rule of law and appreciate the valuable services that financial institutions, large and small, provide to consumers. In particular, the CFPB should end its “one-size-fits-all” approach to regulation, which assumes that financial institutions are the enemy of the consumer and thus that any regulatory action that harms banks helps the public. The irony is that the CFPB has, in fact, failed to protect consumers from real problems, such as the Equifax data breach that threatened the personal information and financial security of millions of Americans — despite the fact that consumers had lodged tens of thousands of complaints with the CFPB against Equifax.
It is time to halt the CFPB practice of treating big banks and community banks alike, subjecting them to identical burdensome regulations. While big banks are able to absorb the resulting compliance costs, small and medium-sized banks across the country have gone out of business, suffocated by paperwork and numerous, complex regulatory constraints. In Oklahoma, we have over 100 community banks that serve small town and rural Americans, which are now struggling for existence under CFPB rules. The next CFPB director must understand the benefits and needs of community banks, which offer many Americans outside of big coastal cities of vital access to credit.
Financial regulation is not about picking winners and losers, but rather fostering an environment in which consumers can safely access useful financial instruments. For that, banks — and, in particular, small banks — must be able to afford to provide these services. This is a fragile ecosystem with many parties, all of which are necessary for the survival of the whole. The first director of the CFPB did not understand this; I hope his successor will.
Mike Hunter is Oklahoma Attorney General.