Let non-profits tap residual CFPB penalty funds: The time to put this money to use is now
Last year on July 28, former CFPB Director Kathy Kraninger attended a meeting requested by the heads of three non-profits (Credit Builders Alliance, Mission Asset Fund and Rural Dynamics). The purpose of the meeting was to discuss our proposed use of Civil Penalty Funds to support non-profits’ financial counseling, coaching, and education efforts.
The three of us represented the non-profit “financial capability” community, which has experienced an unprecedented surge in demand for its services. From the need to prioritize which creditors should be paid first, to avoiding eviction, to understanding the emergency resources available to them, to deciding whether to file bankruptcy — families need access to an impartial financial advocate that can help them navigate these challenges.
Even before the COVID-19 pandemic, millions of families lived life in the financial shadows. Being unconnected to mainstream financial institutions, life is full of closed doors. It is nearly impossible for them to get approved for an apartment, a credit card and sometimes even a job. About one in 10 adults are “credit invisible,” according to the CFPB. Credit invisibility means that a person lacks a credit history and is, therefore, ‘invisible’ to a lender. Many of these people are deemed “essential workers,” yet struggle to access affordable credit.
The coronavirus pandemic turned this already dire situation into a full-blown crisis that has eviscerated vulnerable families as well as our nation’s economy, which in 2020 experienced the worst year for economic growth since World War II.
During the meeting, Kraninger listened to our arguments but afterwards did not act. And now, as of the end of September, the agency has amassed $576 million in its civil penalty fund.
There are only two purposes for this fund, to compensate victims of financial fraud and for financial education. During our meeting we requested the CFPB consider releasing a portion of these funds for non-profit financial counseling organizations to continue to provide the appropriate services to those in dire need. Without an infusion of money, many of these vital nonprofits will not survive.
There is a clear solution: use a small percentage of the Consumer Financial Protection Bureau’s Civil Penalty Fund to contract with nonprofits, enabling them to deliver outstanding financial counseling and guidance to individuals and families suffering through this crisis.
The CFPB Civil Penalty Fund comes from fines companies pay after the CFPB penalizes them for defrauding consumers. According to the Civil Penalty Fund rule, if victims cannot be located or it is otherwise not practicable to pay victims, the bureau may keep the money in the fund for victims in future cases, or the bureau may use money in the fund for consumer education and financial literacy programs. The CFPB can enter into contracts for the purpose of financial education. There has been precedent for this with past successful contracts.
The financial counseling work that the nonprofits do cannot be replicated at the CFPB. It serves to augment the excellent financial education materials that the CFPB has created. But without supporting the infrastructure that interacts with consumers on a daily basis, materials alone will not solve the immediate financial crisis.
There is precedent for this type of innovative use of money collected from fines. The state of California kicked off the CalMoneySmart program, which provides $4 million to nonprofit organizations that deliver financial education and empowerment tools to help consumers improve their financial well-being. This program is funded by a similar state mechanism as CFPB’s Federal Civil Penalty Fund. The CalMoneySmart program is a good start, but we need solutions like this at the national level to address the growing need arising from this crisis.
Some say that the money in the Civil Penalty Fund is only intended for victims of financial fraud and that the CFPB is still tracking down victims for payment who could benefit from it. If you use some of that money for financial education, the argument goes, what happens when there is no money left over for victims?
Historically, it has been very hard to track down every single intended recipient of CPFB funds, meaning there is always a large sum of money sitting in the fund. In fact under Kraninger, the CFPB tapped the fund to pay only $11.4 million to consumers in 2020.
Could offender companies go bankrupt before paying penalties, further straining the fund? Sure. But even in that hypothetical scenario, it is highly unlikely it would drain the fund. It is not a convincing reason to leave money sitting in a government bank account that could be used today to help desperate, struggling families and our nation’s economy.
Yet, a small percentage of the $576 million could be a lifeline for these financial nonprofits, the consumers they serve, and our economy itself. Why not use a small percentage of the overall fund for one of its intended purposes? The time to put this excess money to use is now. Families, the nonprofits who help pull them out of poverty, and our nation’s economy cannot wait any longer.
Dara Duguay is CEO of the Credit Builders Alliance.