Ever since its creation, the Consumer Financial Protection Bureau (CFPB) has been the focus of heated controversy, with banks and politicians alike calling for cutbacks in its authority, if not the agency's outright elimination.
The threats to the agency's future became far more real on Nov. 8 with the victory of Donald Trump and Republican control of both chambers of Congress, setting the stage for the GOP to turn back many of the CFPB's policies. Trump has spoken of repealing the Dodd-Frank Act, which created the bureau.
House Financial Services Committee Chairman Jeb Hensarling, who had been rumored to be a possible Treasury secretary pick in the coming administration, has proposed the substantial weakening of the CFPB in the Financial Choice Act. The bill would reduce the bureau's rulemaking authority by repealing all guidance on auto lending, requiring a cost-benefit analysis of all proposed rules, giving Congress direct oversight of its budget, and replacing the current single-director leadership structure with a five-person commission.
This does indeed sound alarming, but let's take a step back. When analyzed objectively, the bureau has a rather modest mission, making it hard to see what all the fuss is about.
The mission of the CFPB is to ensure that markets are truly safe, fair, and free. Among its goals is the elimination of fraudulent, unfair, deceptive, and discriminatory practices. For example, the bureau has established a seemingly straightforward—yet controversial— standard for mortgage lenders to assess a borrower's “ability to repay.” This is similar to the standard set forth in a proposal on short-term, small-dollar lending. The financial services industry has railed against such a principle, yet all it seeks is for lenders to make sure borrowers have the resources to pay back a loan. This has traditionally been viewed as sound underwriting—a “best practice.”
Research for my forthcoming book about the CFPB included interviews with over 50 current and previous agency staff. Among them, there was no uniform call to break up large financial institutions, nationalize any bank, or create any kind of alternative to traditional, market-based, for-profit, private institutions.
Their suggestions for further reforms included better and broader consumer education, better clarification of rules, and the simplification of certain forms and procedures. But all comments were guided by a desire to make markets work better.
Despite the modesty of its mission, the drumbeat to defang—if not defund—the CFPB is now louder than ever.
We asked respondents how the CFPB should respond if criticism of the agency were to become even more threatening. The scenario, which was laid out before the election and ended up being prescient, was of an administration getting elected that would be less friendly to strong consumer protection policy and practice than the Obama White House. The basic response, from CFPB Director Richard Cordray on down, was that the best thing for the CFPB would be for it to focus on doing the jobs it was tasked to do as effectively as it could.
Maybe this reflected naiveté on the part of CFPB staffers. An alternative strategy might have been to anticipate the attacks and develop a strategy for responding. Maybe. But what the actual responses suggested was that the CFPB has been driven, right from the start, not by ideology, but simply to do its job. And that job is to make markets work better, to enable consumers to be treated fairly and effectively so they can get the credit they deserve, and to enable financial institutions to operate in a stable and profitable manner, without fear of bubbles and system-threatening crises.
The 2008 financial crisis revealed that markets do not always work that way. Truly transparent markets that our respondents envisioned can ameliorate the costs of economic catastrophes.
It is still too early to know whether the incoming administration means to truly defang the CFPB. Perhaps the fury stoked by Trump's victory—similar to the fury that often accompanies the beginning of a new administration—will settle down. If so, perhaps all parties can focus on the goal of supporting the basic mission of the CFPB: to assure free and fair markets.
[A version of this article originally appeared in American Banker.]
(Image: Riccardo Cambiassi, via flickr, CC BY-SA 2.0)