Who could be against consumer protection? The 2007-2008 financial crisis saw record numbers of mortgage foreclosures, left large numbers of Americans “underwater”—owing more in mortgage principal payments than their homes were worth—and many more carrying more credit card debt than it seemed they could afford. Consumer financial protection was the motivation behind the creation of the Consumer Financial Protection Bureau (CFPB), a new agency designed to protect American consumers from bad actors in the financial services industry.
The CFPB was meant to protect American pocketbooks and property. However, its founders—the drafters of the Dodd-Frank Act of 2010—felt that in order to do so, it had to be protected from political interference. That resulted in the agency being insulated from accountability to the president, Congress, and the courts. Dodd-Frank gave the CFPB three mechanisms for avoiding accountability:
- Its funding comes not from congressional appropriations but from the Federal Reserve, which is to supply whatever the director requests up to a certain amount;
- It is headed by a single director appointed for a fixed term of five years who may not be fired by the president except for “cause,” such as dereliction of duty or malfeasance; and
- The courts are required to give extra deference to the CFPB’s decisions in some cases.
These provisions violate constitutional norms of checks and balances on executive power and have led the CFPB to abuse its power, including by trying to regulate in areas where its statutory authority is expressly limited.
For example, the CFPB attempted to regulate auto lenders, which are exempt from CFPB oversight under Dodd-Frank. The CFPB alleged that an indirect auto lender’s markup and compensation policies may be sufficient to trigger liability under the Equal Credit Opportunity Act (ECOA) if the lender’s credit decisions result in discriminatory outcomes. The CFPB then issued guidance on how auto finance firms can avoid being found in breach of the ECOA, indirectly regulating auto dealers by prescribing what kind of financing they may offer. An independent study of the CFPB’s methodology concluded that it severely overestimated the number of minority consumers supposedly harmed by the practice. This led to white consumers getting refund checks for supposed racial discrimination against them as African-Americans. Cordray admitted that the CFPB’s methodology contained mistakes. An agency subject to adequate constitutional oversight would probably not have been tempted to make these mistakes.
The CFPB has also failed in its core mission of protecting all consumers. For example, while it celebrated the fines it levied on Wells Fargo over its “upselling” scandal—in which bank staffers misled customers into opening new accounts for new services, and in some cases fraudulently opened accounts in their names without their knowledge—it failed to notice the bank’s abusive practices until it was alerted to them by The Los Angeles Times and California regulators, despite the bank being under Bureau supervision at the time.
Consumers have actually been harmed by CFPB rules. This is because it was set up with a one-size-fits-all mentality at its core. It was empowered to create rules that would apply to financial products in every case, based on the false premise that a government agency can design the appropriate financial products for a large and diverse society. This has denied many consumers access to useful, money-saving products. Consumer protection is ill-served if consumers are “protected” from getting access to products that suit their individual circumstances, or are forced to pay more for a less desirable financial product.
One of the arguments advanced in favor of creating a consumer financial protection agency was that it would fulfill a purpose analogous to the Consumer Product Safety Commission. The argument was that, just as a faulty toaster could lead to your house burning down, so a faulty mortgage could lead to you losing your house. The analogy was faulty from the start. A faulty toaster design is faulty for everyone, but financial products serve different customers with different needs. For example, for someone in the right circumstances, a 30-year, interest-only, adjustable rate mortgage can be a prudent choice, even if it is wrong for someone else who does not plan for possible fluctuations in interest rates. Banning the mortgage would help the latter borrower, but harm the former by forcing her to take out a mortgage that costs more, allocates the costs over time in a more burdensome manner, or fails to take account of other circumstances, such as a plan to move in the near future.
Moreover, because of the complexity of financial products, the CFPB’s rules have tended to be extremely long and complicated, imposing a huge compliance burden on financial institutions—which pass on those costs on to consumers in the form of higher fees or reduced product choices.
At the very least, the CFPB needs significant structural reform to alleviate these problems and bring it within constitutional constraints. The CFPB’s poor constitutional design insulates it from accountability to Congress, the president, and the courts. That lack of accountability predisposes the CFPB director to abuse the agency’s authority.
The CFPB is too problematic to fix by relying on better discretion from its director and other personnel. Even if it were brought under proper constitutional oversight, its one-size-fits-all approach is deeply at odds with the needs and aspirations of millions of individual American consumers.
Current court cases, such as the PHH case currently being reheard, could provide some relief to the constitutional problems by, for example, reaffirming the previous decision that the director should be answerable to the president, although that would leave outstanding the constitutional objections in relation to the role of Congress and the courts.
One legislative solution would be to recognize the inherent difference between consumer product protection and financial protection and abolish the agency, transferring consumer protection duties back to the banking supervisors and the Federal Trade Commission.
If Congress is unwilling to take this step, the CFPB at least could be brought back within constitutional constraints and made subject to adequate supervision by the president, Congress, and the judicial branch, while being required to submit adequate justification for its rules to the Office of Management and Budget and to Congress for higher cost rules. This should at least assert some discipline over the agency.
The CFPB represents a drastic change to the way Americans are governed. The remedy for its abuses needs to be equally drastic.