Yesterday marked the fifth anniversary of the Consumer Financial Protection Bureau. And the most important thing about the agency is that it exists.
You can praise its ability to retrieve money for consumers swindled by financial institutions — and I will. You can quibble with how aggressive they’ve been in laying out new rules to safeguard the public — and I will. But the CFPB’s main advance comes in housing federal consumer protection in one place, rather than shoehorning it into other offices that didn’t prioritize or particularly care about the issue.
Just having cops dedicated to the beat, as CFPB brainchild Elizabeth Warren often says, has improved the situation for consumers as they search for mortgages or auto loans. That’s not necessarily a permanent condition, though. No agency is immune to regulatory capture, and what will define CFPB in the future is its willingness to remain steadfast in its public interest mission, rather than transforming into a factory distilling favors to the financial industry.
Before CFPB, consumer protection didn’t have a home at the federal level. State laws governed some credit transactions, but they were hampered by federal Supreme Court rulings like Marquette v. First of Omaha, which enabled financial institutions to set up shop in the state with the loosest regulations and export their products nationwide, without having to comply with another state’s rules. This is why most credit cards come from South Dakota and Delaware.
No one federal agency had oversight responsibility for a patchwork of laws — it generally depended on whether you were a nationally chartered bank, state-chartered bank, nonbank institution, thrift or bank holding company. Financial institutions typically chose their regulator rather than the other way around. And consumer protection was only one among many issues for these agencies. For example, the main responsibility for consumer protection in lending products went to the Federal Reserve, which demonstrably prioritized safety and soundness of the banks over any consumer complaint. That was especially true under Alan Greenspan, who viewed regulation the way an exterminator viewed termites.
CFPB changed all of that. Warren, in her initial proposal, compared it to the Consumer Product Safety Commission, which only focuses on protecting consumers from hazardous products. A similar agency for financial products need not balance other priorities that potentially cut against consumer protection. It would have sole authority to write rules, police consumer financial markets, accept consumer complaints and research potential areas of concern.
The first five years have largely borne that out. A recent report by University of Utah law professor Christopher L. Peterson finds that, through the end of 2015, CFPB has recovered over $11 billion for consumers from 122 different financial institution scams, whether in debt collection, credit card services, mortgage servicing or other areas. No bank has contested any of these enforcement actions, and the CFPB has yet to lose a single case.
Peterson also found that CFPB has effectively coordinated with state and federal law enforcement, one failing of the pre-CFPB consumer protection regime. This was an efficient agency as well: For every CFPB employee, approximately $9.3 million in relief was delivered to consumers.
Furthermore, the use of a public database to record and publish consumer complaints is really innovative for a federal agency. Advocates and the media can identify patterns of abuses and force stronger scrutiny. This level of transparency from government is refreshing.
That doesn’t mean enforcement has been uniformly terrific, however. CFPB has not taken action against pawn shops or international remittance companies, and it’s done little against payday lenders (an area where it is currently writing new rules). These happen to be services used by poorer Americans. The leading categories of enforcement, against mortgages and credit cards, are for products used by higher-income people.
Though the agency received new authority to stamp out “abusive practices” in addition to unfair and deceptive ones, it has done little with this power, using it in only 11 percent of all cases. “While the Bureau has understandably proceeded with caution, deploying our national prohibition of abusive finance to serve the public welfare should remain a top supervisory and enforcement priority,” Peterson wrote in his paper.
While it’s the Justice Department’s responsibility to prosecute in instances of fraud, many hoped CFPB would ramp up individual accountability for violations of financial laws. However, most of the enforcement activities have resulted in uncontested settlements, and in 62 percent of its cases, the agency charged no individual with violating the law. These individuals are overwhelmingly situated in non-bank financial institutions; practically no bank employee has been held individually accountable.
With respect to rule-writing, there’s a similarly strong record to tell with some associated concerns. CFPB’s mortgage rules have led to recent-vintage loans performing as well as any in decades. They have issued strong rules banning arbitration clauses in financial products as well as unfair debt collection practices.
The beauty of the mortgage and arbitration rules is that CFPB just banned bad practices, rather than forcing disclosure or allowing some incidences of it. In other areas, CFPB hasn’t been as direct. While its mortgage servicing rules have been nominally effective, especially when the agency prevents servicers from acquiring new loans if they fail to follow the law, they didn’t attack the heart of the problem: the compensation structure that incentivizes foreclosures over loan modifications. On payday lending rules, loans with outrageous interest rates could still be allowed, and members of Congress have urged CFPB to strengthen the regulation.
But the very presence of CFPB matters more than precisely how aggressive or lenient it has been in its initial five years. Even a relatively timid consumer agency looks like a tiger compared to the practically non-existent performance of prior years. Consumer protection is practically the only area of financial reform where Congress streamlined the regulatory structure to increase authority, accountability and performance.
That doesn’t free it from the possibility of corruption, of course. A bureau head disinclined to police the markets, or the slow creep of industry expats into the agency, would diminish the hopes for CFPB to realize its mission. I don’t suspect Donald Trump’s CFPB director would have a mind to be vigilant (especially regarding for-profit university scams!).
Nevertheless, the intelligently designed structure of CFPB does give it a measure of independence. And agencies actually do build cultures. From the start, CFPB has been far more attentive to criticism over not going far enough than going too far. Officials have been interested in figuring out how to best serve the public and open up the process, rather than being insular. And just their existence makes financial operators considering something shady have to think twice. Beyond anything else, that’s progress.