Ethics Assessment: Consumer Financial Protection Bureau

By: David Charlwoodethics assessment: consumer financial protection bureau

One prominent aspect of the Dodd-Frank Act of 2010 is the formation of the Consumer Financial Protection Bureau.[1] What has been this agency’s impact?

President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, (Dodd-Frank) on July 21st, 2010. It involved significant reform to financial regulation, and the scale of the change is comparable to those that occurred in to the Great Depression of the 1930’s. The cause of meaningful reform was the same in both situations: a seemingly wholesale collapse of the financial system. The Dodd-Frank reforms spanned over 2,300 pages of legislation.

The legacy and activity of the CFPB has yielded mixed results for consumers and industry. Ideological differences within the organization have, at times, limited its reform activities. Regardless, the CFPB is playing a unique and important role as an advocate for consumer rights, in an economic environment where income and wealth inequality continues to be a problem. The organization is an attempted correction to a financial market indifferent to millions who exist on minimum wage or less.  This is a reason the agency should be robustly defended against its critics.

Polarization and Popularity

The CFPB was set up to be independent of Congress.  First, the entity is funded by the Federal Reserve (that is, at arms-length from Congress), and second, the Director can be removed only “for cause”. Yet, these provisions have only ensured politicization of the Bureau from the very beginning. This circumstance has undoubtedly hampered its ability to deliver effective financial reforms.

The CFPB as an idea was given impetus by Elizabeth Warren. Given her subsequent political career perhaps its political independence would always have been called into question, particularly in the current political climate, which puts partisanship above constructive debate between the parties. Interestingly, despite the polarisation of opinion about the Bureau amongst politicians, successive polling finds the CFPB has popular support amongst the American public. A Center for Responsible Lending poll in June 2017 found 74% of respondents in favor of the CFPB and its mission, and this support was largely bipartisan, with 66% of Republicans in support (American Banker, 19thJuly 17). This level of popularity is effectively the same as when the Bureau began in 2011 (Consumers Union, 2011) and has continued into the first year of the Trump administration. This gives rise to a situation where a government, that controls the House, Senate and the Presidency, has stated its unequivocal intentions to dismantle the Dodd-Frank reforms, but has rarely engaged in direct attacks on the CFPB itself. The activities of the CFPB, and their consequences for both consumers and industry, are the focus, but these activities can only be understood in the light of the current precarious existential situation in which the CFPB finds itself.

CFPB’s Mission and Activities

The CFPB has a core mission that drives its activities: “ensure… that markets for consumer financial products and services are fair, transparent, and competitive” (Horn, 2017). The financial transactions which are its primary concerns are consumer mortgages, personal loans and credit (covering student loans, credit cards, payday lenders and other small credit suppliers). The CFPB also has broad monitoring and enforcement power over the institutions, which provide these types of financial services, and additionally has extensive rule-making capabilities (Chanin, 2016). The financial institutions under the Bureau’s ‘jurisdiction’ include banks and credit unions with total assets over $10 billion, mortgage lenders, mortgage servicers, and payday lenders of any size, and any other consumer financial entity the CFPB considers important within consumer financial services (Chanin, 2016).

Aside from being a powerful agency, the methodology of its approach to financial reform is heavily data-driven, indicating a break from traditional bureaucratic methods of developing policy (Horn, 2017). For example, the CFPB maintains several databases of information on consumer habits, including the National Mortgage Database, from which the CFPB was able to conclude that “almost half of consumers who take out a mortgage for home purchase fail to shop prior to application.” (CFPB, 2015). The CFPB also maintains a consumer complaint database.

Legal Controversies

The CFPB has proven to be legally controversial. In recent months, triggered by the former Director, Richard Cordray, stepping down from his duties, there has been a legal tussle of succession between Leandra English (Cordray’s Deputy Director and favored successor) and Mick Mulvaney, a Trump appointee who has made clear his disdain for the CFPB and its mission, having called it a “sick, sad joke” (Vox, 2017). While the Trump administration secured an early legal victory, with Mulvaney now in effective control, the ongoing legal saga has clouded the effectiveness of an organization already facing a concerted effort by Republicans (and some Democrats) to stymie many of its proposed reforms. The legal situation is made more complicated by several legal proceedings challenging the constitutionality of the structure and funding processes of the CFPB, and the unusually independent nature of its Director who can be removed by the President only “for cause”, instead of at will (Simpson, 2016). The consequences of this situation for consumers and industry is uncertain.

CFPB’s Financial Reforms

The CFPB has been delivering financial reform at breakneck pace. The CFPB has captured approximately $3.6 billion in restitution to consumers, and assessed more than $550 million in civil money penalties (Chanin 2016). Compared to the organization it replaced (the Office of Thrift Supervision), the CFPB has been vociferous in its advocacy for the protection of consumers. Its latest fines have proven to be controversial. Wells Fargo, an American bank, was fined $100 million by the CFPB on September 8th2016 for the “widespread illegal practice of secretly opening unauthorized deposit and credit card accounts”, which the CFPB charged had been an ongoing practice since at least 2011 (CFPB, 2016). This penalty is the largest imposed by the CFPB on a financial institution. While this may appear a strong win for consumers, some critics of the CFPB focussed on whether the Bureau played only a secondary role in uncovering the scandal, as compared to Los Angeles County District Attorney‘s office. In other words, critics argue the CFPB is an unnecessary bureaucratic layer in a system already capable of uncovering consumer financial scandals (CEI, 2017). However, the LA Attorney’s Office disagrees with this representation, in a statement contending that “the CFPB was integral to our collective work holding Wells Fargo accountable for fake accounts, including assuring Wells’ customers across the nation got relief.” (LA Times, Sep 2017).

A high point of the CFPB’s attempts to integrate data analysis and consumer protection came from its overhaul of TRID disclosures. The agency combined previous mortgage disclosures required under the Truth in Lending Act with data from the Real Estate Settlement Procedures Act (Center for Plain Language, 2012).  On the proposed mortgage disclosures, the CFPB conducted both extensive qualitative and quantitative studies to show the new disclosure rules would benefit consumers. The study concluded there was a “statistically significant performance advantage of approximately 16 percentage points for the proposed disclosures” (Kleimann, 2013). The reception to these new disclosures was overwhelmingly positive, in that they allowed consumers a much easier understanding of their mortgage obligations. The new disclosures resulted in the CFPB being the recipient of the ClearMark Grand Prize in 2014 from the Center of Plain Language, with the organization’s chair remarking “the testing that went into this redesign – both before and after – is impressive, and it shows in the results” (BusinessWire, 2014).

Ethical Concerns

Considering the various actions of the CFPB, it is clear there are two ideological strands that largely govern how it operates. Elizabeth Warren, and her successor Richard Cordray, favoured a ‘cop on the beat approach’, that would concentrate the agency’s considerable influence on curbing suspicious activities of financial institutions and their financial products. This ideological approach can be witnessed in the current issue of payday loans, as the CFPB seeks to clamp down on the industry’s often laissez-faire lending practices (CFPB, 2017).

Competing against this strategy is an alternative approach that favors consumer information and education rather than dealing directly with financial institutions. Supporters of this perspective contend the former approach limits options of consumers and is paternalistic in nature. Reforms enacted by the CFPB utilising this approach include various information databases it maintains to give consumers more transparent information, and redeveloped compulsory disclosures accompanying certain financial products. The opposing views of the CFPB’s strategy often results in an ethics deadlock within the CFPB: Is paternalism justified if its consequences are preventing consumers from accessing bad financial products, or is this cost of limiting financial freedom too high?

The tension is evident with payday loans: Simply improving consumer awareness may not be enough when dealing with these usurious financial products, particularly when the target markets for such products are typically at risk financially. This is exacerbated by the apparent willingness of some sectors within the payday loan industry to attempt to avoid oversight: “Regular non-bank payday lenders are constantly gaming the system; that is, circumventing state laws intended to regulate their loan products” (Johnson, 2012.) Clearly, both elements are required to work together, but the correct proportion has led to criticism of the CFPB from both sides, perhaps hampering its ability to deliver on consumer protection.

Effects on Industry

The CFPB has been the recipient of sustained criticism since its creation. The financial industry has been divided on whether the CFPB is welcome news. One study, for example, shows the extra work required by its regulations may have a harmful effect on the ability of small community banks to succeed (Pierce, Robinson, Stratmann 2014). While the assets of these rural banks are under $10 billion, the CFPB regulations still apply as the majority of these financial institutions are involved in mortgage lending, which the CFPB monitors regardless of the size of the entity. The study found that compliance costs had risen, small banks were concerned about the CFPB’s activities, and 25% of small banks surveyed were considering mergers (Pierce, Robinson, Stratmann 2014). The effect on small banks is a negative one, and the last point is of particular concern for consumer advocates. Because of bank consolidation and reduced commercial competition, consumers may face dwindling choices and increased costs over time. Congress is currently working on legislation to exclude small banks from certain portions of Dodd-Frank and CFPB oversight given these concerns.

Other Elements of Dodd-Frank

Despite the focus on the CFPB, other aspects of the Dodd-Frank reforms are important enough in their effects on consumers and industry to merit mentioning. Two of its major legislative enactments, aside from protecting consumers, are focussed on preventing another systemic financial collapse. To this end, the so-called “Volcker” rule (separating deposit-taking and proprietary trading) seeks to stop financial institutions that trade in risky financial transactions from also participating in regular deposit-taking activities (Whitehead 2011). This rule prevents regular banking from being exposed to the kinds of speculative trading that was in part responsible the global financial crisis of 2008. Some argue that, while the Volcker rule was set up with good intentions, it doesn’t quite reflect the increasingly interconnected reality of markets and risk management (Whitehead 2011). Related to this point is Dodd-Frank’s intended aim of ending the concept of “too-big-to-fail”. While a prominent group of economists and academics called for overly large institutions to be broken up (Ritholtz, 2013), Dodd-Frank took a softer approach and began supervising the activities of banks with over $50 billion in assets, categorizing these institutions as being “systemically important” (Federal Reserve, 2012).

Conclusion

The CFPB is a necessary element within a flawed financial system, being an imperfect attempt to strengthen consumer protection through legal action and reform. Its more prominent achievements, such as the new TRID mortgage disclosures, have enhanced the financial rights of consumers. Payments returned to consumers from the result of legal action initiated by the CFPB show a willingness to target large financial institutions, and have instilled a regulatory culture that prohibits structural dismissals of consumer rights. For industry, the effects of the CFPB have been more mixed. There are some valid concerns around the effect of the CFPB’s regulatory activities on smaller financial institutions such as community banks, and there is current debate on the appropriate threshold level of assets which allows the CFPB to begin its monitoring.

The CFPB is an excellent platform to build upon, and to this end ensuring its promotion of new policies is backed by stronger research (as was the case with the TRID reforms) would help defend the CFPB from criticism. The immediate future of the CFPB is uncertain. Despite its popularity with the American public, many Republicans are opposed to its activities and the Dodd-Frank reforms more generally. While Congress will likely remove some elements of the Dodd-Frank legislation, the CFPB will remain in intact in some form. The consequences of this situation will be in part determined by how the CFPB navigates the current volatile political climate. Most immediate is the current legal tussle over the CFPB’s Directorship. If Mick Mulvaney is given control of the Bureau, Republicans may have found a way to neuter the activities of the CFPB without having to repeal its existence. For consumers, that would be a heavy blow indeed.

 

  1. It should be noted that this isn’t to diminish aspects of the legislation, such as tackling “Too-Big-to-Fail”, but that the CFPB has become within recent years (to both supporters and detractors) the public face of Dodd-Frank.

 

 

 

References

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