Congress, Please Reform the Consumer Financial Protection Bureau
My Competitive Enterprise Institute (CEI) colleague Devin Watkins recently testified on Capitol Hill before the House Financial Services Subcommittee on Financial Institutions and Monetary Policy. His topic was the future of the Consumer Financial Protection Bureau, and he had a very deliberate focus on what has become the CFPB’s most controversial feature, its independent funding mechanism. Devin told the subcommittee members:
The most critical CFPB reform is to ensure that its funding comes through congressional appropriations instead of the Federal Reserve. The Dodd-Frank Act bypassed congressional appropriations to avoid Congress’s future oversight of the CFPB. This attempt to immunize funding from congressional decisions is a direct affront to democratic control and is prohibited by the Constitution. An important consequence of this change was the elimination of public accountability. Ultimately, any funding mechanism that appears designed to evade Congress’s supervisory role is of questionable constitutionality.
The CEI team has been working to correct the errors of the CFPB for many years. Vice President for Strategy Iain Murray wrote in 2016 about five ways that the agency’s regulations at the time were harming the middle class:
- Qualified mortgage (QM) rules
- Making low-dollar short-term loans very difficult to get
- Attempting to ban the use of binding arbitration services in financial contracts
- New rules for prepaid products that could hurt innovative payment methods
- Compiling massive amounts of data that violate your privacy
Iain also reported in 2017 on the CFPB’s slush fund:
When the CFPB collects civil penalties, they are dropped into the Civil Penalty Fund, which, like the CFPB itself, was established by the Dodd-Frank Act. Some of this money is used to provide compensation to victims based on harm. When no victims can be found, the money goes toward consumer education and financial literacy programs, according to the CFPB
As of September 2016, the CFPB spent 61 percent of all fines collected on victim compensation, while only 5.5 percent of the funds have gone to consumer education. A small amount has been used for administrative costs. The rest remains in the fund.
CEI alum Daniel Press wrote about the myth of the agency’s independence in 2018:
…the idea that the CFPB’s extreme insulation has made it independent of political influence is patently false. In fact, the Bureau has already been captured by special interests—such as consumer and progressive groups—to represent one brand of politics and one vision of consumer protection, and it has been brazenly resisted any attempts to reflect a diversity of opinion. This does not constitute the kind of independence that CFPB proponents urge us to protect.
In 2020 Matthew Adams, now CEI’s Senior Government Affairs Manager, wrote about some good news in the world of enforcement:
After almost a decade of ambiguity, the Consumer Financial Protection Bureau (CFPB) has finally offered some clarity to its definition of what constitutes an “abusive” practice by lending institutions like banks and credit unions.
In a policy statement issued last week, the Bureau outlines what an abusive practice is and how regulators will handle supervision and enforcement actions. The statement defines an abusive act or practice as one where “the harm to consumers outweighs the benefit.” Moreover, the Bureau notes that it will only seek monetary relief in those situations “when there has been a lack of a good-faith effort to comply with the law.”
And in 2022, Director of Finance Policy John Berlau submitted a comment letter on a possible proceeding on “junk fees” charged by companies:
We urge the CFPB to end its inquiry into “junk fees” soon and take no further regulatory action regarding them. “Junk fees” is a subjective and paternalistic term that puts the subject matter out of the CFPB’s jurisdiction. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave the CFPB the power to police fees that are “unfair, deceptive, abusive.” Although we have argued that the term “abusive” is vague and its definition should be tightened,1 that term at least conveys a seriousness that is entirely missing when CFPB choose to utilize the word “junk” to describe fees its leadership does not like.
There’s a lot more here on the website, but that’s a solid taste of our work on the subject. Hopefully Devin’s recent testimony persuades members of Congress to listen and pass needed reforms, like asserting direct authority over the agency’s budget, in the near future.