This month, the Treasury Department issued a report to President Trump in response to his executive order on regulation of the U.S. financial system. While the report does not seek to do as much damage to consumer protection as the House’s Financial Choice Act, it proposes a dramatic weakening of the federal government’s role in the consumer financial services market. In particular, the report advocates that the Consumer Financial Protection Bureau’s mandate be radically constrained.
Republicans have been seeking to weaken the CFPB since it was created as part of the Dodd-Frank Act. The bureau took over responsibility for consumer protection regulation from seven federal agencies. Republicans have been far more antagonistic to the bureau than many of the lenders it regulates. Lenders have seen the value in consolidating much of their regulatory compliance into one agency.
The CFPB is one of the most effective elements of the Dodd-Frank Act. Most importantly, it has changed the ethos of the financial services market from a “watch your wallet” environment to one where consumers can feel they are getting a fair deal from lenders. The importance of this change cannot be overstated, but 10 years after the financial crisis, many have forgotten just how predatory the mortgage market and other consumer credit markets can be.
The Treasury report contains a laundry list of complaints, small and large, about the bureau without discussing them in the context of the CFPB’s signature achievement. It also argues that the bureau’s “approach to enforcement and rulemaking has hindered consumer choice and access to credit, limited innovation, and imposed undue compliance burdens, particularly on small institutions.” This critique contains grains of truth but they require mere tweaks to address the CFPB’s structure, rather than a wholesale change.
The Treasury’s report proposes that Congress enact legislation to dramatically limit the independence of the bureau. There are many reasons why this change is not in the interest of consumers. But the most important reason why such legislation is a bad idea is because it presents a Trojan horse opportunity for special interests to gut the CFPB’s supervisory, enforcement, and monitoring authority. The House, with its passage of the Financial Choice Act, has already made it clear that they are prepared to climb into the Horse to prepare for that sneak attack on consumer protection.
The report does propose some reasonable regulatory changes to expand the credit box where the CFPB has limited it too much. There is certainly evidence that mortgage credit could be expanded further without returning to the dark days of the early 2000s.
There is also a lot of industry criticism of the regulatory burden that the bureau has put on small lenders and industry players involved in residential real estate closings. The CFPB should take these criticisms seriously and seek to increase the efficiency of its various regulatory regimes and clarify the liability that companies face when they occasionally and unintentionally violate the rules.
More generally, the report argues that the bureau’s jurisdiction overlaps with that of other regulators. That is a red herring. The fact is that abusive lending practices were rampant in the years leading up to the financial crisis. The CFPB has dramatically reduced those practices where the previous regulators like the Federal Reserve turned a blind eye to them. Safety and soundness regulators like the Fed and the Office of the Comptroller of the Currency have typically placed consumer protection at the bottom of their list of concerns. This was blindingly obvious during the subprime boom 15 years ago.
The fact is that many of the Treasury’s criticisms can be addressed by the next CFPB director. The next director will be appointed by the president after the term of the current director, Richard Cordray, ends next year. There is little need for legislative action that will likely provide the bureau’s opponents with cover to gut the effective consumer protection regime it created in the wake of a financial crisis precipitated by the predatory behaviors that were endemic in the mortgage market in the early 2000s.
David Reiss is a professor at Brooklyn Law School and director of academic programs at the Center for Urban Business Entrepreneurship. He is also the editor of REFinBlog.com, which tracks developments in the rapidly changing world of residential real estate finance.
The views expressed by contributors are their own and are not the views of The Hill.