The Little Guy's Financial Watchdog May Soon Be Defanged
Policy + Politics

The Little Guy's Financial Watchdog May Soon Be Defanged

REUTERS/Larry Downing

President Trump is using his 2018 budget to chip away at the underpinnings of a government agency set up to protect the little guy from powerful big banks, credit-card companies and predatory lenders.

But the courts may do his work for him.

The Trump budget calls for the Consumer Financial Protection Board – largely a creation of presidential bête-noire Senator Elizabeth Warren (D-MA) – to be “restructured,” a move that the Office of Management & Budget says would save $145 million in fiscal 2018.

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Republicans on Capitol Hill have long complained about the structure of the CFPB, created as part of the Dodd-Frank laws passed in response to the financial crisis, for two reasons: Congress does not control the agency’s budget – currently about $606 million – which is funded by the Federal Reserve; and the CFPB director cannot be dismissed at will by the president.

As the agency is set up, there is a single director who serves for a five-term. Since the CFPB was created, there has been only one director, Richard Cordray, a Democrat appointed by former President Obama who is viewed by Republicans in Congress as overly aggressive. His term expires in 2018.

Trump is said to be eager to get rid of Cordray, who is said to be considering a run for governor of Ohio, but is worried that firing him might spark a backlash in what has become an intensely bitter partisan issue on the Hill, according to Bloomberg. The president also is concerned that making a martyr out of Cordray could boost his potential candidacy in Ohio, Politico said last month.

The White House did not explain how restructuring the CFPB would reduce the federal deficit since its budget is not appropriated by Congress. But the new Trump budget seems to assume that restructuring would result in congressional control of the agency starting in 2019. The supplemental budget provided by the White House shows large funding cuts to the CFPB starting in 2019 – $650 million and rising each year – which would mean the virtual elimination of the agency.

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The savings cited in the Trump budget proposal are a pittance compared with the $11.8 billion in relief that the CFPB claims has gone to almost 30 million consumers because of its enforcement actions. For example, the settlement with Wells Fargo last year over the opening of some 1.5 million bogus accounts brought in $100 million.

But if getting a choke chain on this Wall Street watchdog is the aim of the White House and GOP lawmakers, they may be abetted by a Washington appeals court that is scheduled to hear arguments on Wednesday in a case that has serious implications for the future of the CFPB.

Last year, as part of a case involving a $109 million penalty levied against mortgage company PHH Corp. by the consumer protection board, a three-judge panel of the U.S. Court of Appeals for the Washington D.C. Circuit found that the structure of the agency was unconstitutional, although it declined to say it should be dismantled. The CFPB appealed that decision, and that is why the case is back before the full panel of 11 appeals court judges.

The losers in this bruising battle to control the CFPB are likely to be U.S. financial consumers. The agency boasts on its website that it has responded to more than a million complaints since it was created, and 97 percent of consumers receive “a timely reply” when it gets involved.

Lenders may be less responsive if they know the watchdog has no teeth.