February 28, 2017
Which Is True?
The Consumer Financial Protection Bureau (CFPB) is an independent consumer and financial watchdog agency that offers advice to consumers and levies fines against financial institutions engaged in questionable practices.
The CFPB is an unchecked, poorly controlled agency that restricts the opportunity of financial institutions to operate within a free market and applies punitive actions against corporations in a frequently arbitrary fashion.
Which of these statements is true? The first is clearly true; the second contains degrees of truth. What is also true is that the CFPB is under more fire than it has been since inception under the Dodd-Frank Act. Republicans have offered multiple bills designed to do anything from checking the CFPB’s power to effectively eviscerating it. Should they succeed, what will be the effect?
A Unique Organization
Born in the wake of the Great Recession, the CFPB has been aggressive in its pursuit of protecting consumers from deceptive financial practices and levying fines. In terms of restitution, the agency had returned $11.7 billion to consumers as of July 2016. Direct restitution totaled $3.6 billion, with the rest incorporated in canceled debt, principal reductions, and other forms of relief.
CFPB foes argue that many fines and penalties are levied arbitrarily and without due process because of the CFPB structure, which was designed to be resistant to Congressional lobbying influence. CFPB is headed by a single director, appointed by the President to a five-year term. Its funding comes directly from the Federal Reserve, bypassing the Congressional budgeting process. Without traditional checks and balances, CFPB enjoys an unusual degree of power and discretion to make and implement its decisions.
Recently, the DC Court of Appeals ruled the CFPB structure to be unconstitutional. A few weeks ago, the court agreed to rehear the case in May — but, regardless of the outcome, the case highlights the unusual nature of the CFPB structure and underscores the critics’ point.
If CFPB requires an arguably unconstitutional structure to be effective, how can it be modified while retaining the independence it needs to operate effectively? Should the agency disappear — or be rendered toothless — who will benefit and who will suffer?
Winners and Losers
Banks and other financial institutions would be the likely winners in several areas. They may be able to return to more aggressive marketing practices for their services, and their credit card operations are less likely to undergo scrutiny. Additionally, mortgage loan underwriters and servicers should be able to engage in similarly aggressive practices to improve profitability.
Investors in financial institutions may be winners or losers, depending on whether a more aggressive approach creates greater profits without running afoul of other federal/state laws or regulatory agencies.
The clear losers should be consumers— not a surprise when an agency called the Consumer Financial Protection Bureau is eliminated or weakened. Consumers will lose a rich source of financial education and a simple method for reporting wrongdoing. As with all things political, however, there are shades of gray. Consider CFPB’s targeting of the payday loan industry: If successful, it would protect consumers from predatory interest rates, while simultaneously leaving these consumers with no reasonable lending alternative. Such an outcome underscores the view of most Republicans that the medicine dispensed by the CFPB is generally more harmful than the diseases it treats.
If Republicans have their way in the coming assault on Dodd-Frank, the CFPB will be impacted in one of two ways — it will either be eradicated or emasculated. In either case, consumers will suffer and financial institutions and their investors will gain. In many aspects, that’s true, but there are more subtle effects. It may be better to think in terms of risk control.
Each financial institution will decide how to react to the opportunity to increase risk and assess the potential reward. Some will decide that they have spent enough money complying with Dodd-Frank and the CFPB so far that they are content with minor changes. Others will look at the increased moneymaking opportunities and support a broader dismantling of consumer protections in hopes of a higher return. This could bring back practices the CFPB has viewed as deceptive to consumers and Democrats see as having fueled the Great Recession.
From your position as a financial consumer, you won’t be able to tell the difference in risk without suitable research. As an investor, you must decide whether financial entities in your portfolio are pushing the risk/reward envelope too far. Even without the CFPB and with the new President’s best efforts at financial deregulation, some financial laws and regulations will still exist.
If we are headed back to the Financial Wild West, remember one of the rules of the original Wild West: When the sheriff has been run out of town, you must learn how to protect yourself. Monitor your credit to prevent identity theft and see your credit reports and scores, using our credit monitoring service.
Photo ©Adam Fagen