It started out limping, with a hamstrung leader and determined opponents in Congress seeking any opportunity to trip it up. Yet the agency established in 2011 to protect consumers from abusive financial practices is fast becoming one of the most formidable regulators in Washington.
The Consumer Financial Protection Bureau recently marked two important milestones. Its director, Richard Cordray, was officially confirmed by the Senate last week after spending 18 months in the job as a controversial recess appointee who lacked the full Senate endorsement required to do his job effectively. The agency also hit its second anniversary, a milestone some thought it might never reach, given the bank industry's opposition. “In the end, David beat Goliath,” said Sen. Elizabeth Warren (D-Mass.), who is largely credited with drawing up the blueprint for the CFPB.
If the CFPB was ever an underdog, it isn’t anymore. The agency wields considerable power to police financial firms and prosecute those that violate the rules. Given the rampant abuses that led to the housing bubble and bust, the 2010 Dodd-Frank law that established the CFPB made mortgage reform one of the agency’s first priorities. So the CFPB has already issued several new rules meant to make mortgage lending more transparent and protect vulnerable borrowers. The agency says its enforcement actions have helped six million consumers nab $432 million in refunds from banks suspected of deceptive practices.
The CFPB also gets directly involved in disputes between consumers and banks. Through the end of June, the agency had received nearly 177,000 complaints from consumers about various problems they encountered with banks, and forwarded about 145,000 of those to the companies in question (the rest were incomplete or outside the bureau’s jurisdiction). The CFPB follows up to make sure the company responds, while urging compromise solutions. It also monitors complaints for trends it might explore in future investigations. “It’s a big plus for consumers,” says Pamela Banks of Consumers Union, which publishes Consumer Reports magazine. “If you have a problem, you can go to CFPB and they’ll help resolve the problem.”
Facing down the big banks
There was never much doubt about whether the CFPB would have the power to face down big, powerful banks. That was basically part of its charter. What concerns Republican opponents of the agency and financial industry officials is the risk of the CFPB becoming a regulatory bully that shuts down every new way banks try to make a profit. Libertarians also fret about a new agency that makes decisions on behalf of consumers — instead of educating them about how to make better decisions themselves — adding a new layer to what some feel is already a nanny-state bureaucracy.
So far, the CFPB seems to be tacking toward the center. Cordray has talked about the need to educate consumers about the many complex financial choices they’ll have to make in their lives, without holding their hands or making decisions for them. And financial industry officials say the agency has treated banks more or less fairly.
One of the first issues the agency considered, for instance, was whether a new rule on bank overdraft fees, issued in 2010 by the Federal Reserve, needed further changes. The banking industry advocated a wait-and-see approach, which is what the CFPB ended up doing. “As long as the bureau remains accountable to those kinds of principles, it has a chance of helping all stakeholders,” says Richard Riese, a senior vice president at the American Bankers Association, which initially opposed the creation of the CFPB.
The agency has an ambitious agenda for the future, which suggests it may become more aggressive. A quick scan of the many studies and investigations the agency is conducting hints at several new areas that could come under the bureau’s scrutiny, including payday lenders, privately issued student loans, credit-rating agencies and reverse mortgages.
A "paternalistic" agency
In one recent case, the CFPB successfully prosecuted a debt-collection agency that otherwise might have fallen under the jurisdiction of the Federal Trade Commission. Consumer advocates are delighted there’s a tough new sheriff in town who seems eager to go after the bad guys. But business backers worry about the agency reaching beyond its purview. “It’s a very paternalistic agency,” says attorney Alan Kaplinsky, chair of the consumer financial services group at Philadelphia law firm Ballard Spahr. “They decide what they think is good or bad for consumers.”
Kaplinsky says financial-services companies are now reluctant to roll out new products, fearing the CFPB will come after them. One example: One example: credit-card add-on services, such as identity-theft protection or debt-cancellation services that will pay off your balance if you die, so it doesn’t come out of the estate. The possible fees attached to such services may be something the CFPB would protest.
“Very often, the CFPB may not like something, even if it’s perfectly lawful,” says Kaplinsky. “The rest of the industry says, ‘I don’t want to take a chance that the CFPB doesn’t like what I’m doing, so I’m going to get the heck out of that business.’”
The CFPB may soon court more criticism by taking up issues that plunge it directly into partisan politics, including one that could generate more class-action lawsuits against financial-services firms. The CFPB is reviewing the arbitration clauses that often come with credit-card agreements and other financial products, which typically require the consumer to submit to arbitration when there’s a dispute, rather than suing. If the CFPB were to invalidate arbitration in some way, it could produce more of the class-action lawsuits that Republicans abhor and Democrats tolerate because trial lawyers tend to be big Democratic donors.
One Republican ploy to weaken the CFPB may end up backfiring. By holding up Cordray’s confirmation for 18 months, Congressional Republicans hoped to undermine the CFPB. Yet since Cordray’s official five-year term began only once he was confirmed, he’ll actually end up spending nearly seven years on the job if he stays the whole time. So his first 18 months might have been just a warm-up that allows the CFPB director to begin his first official term at full stride. Before long, the CFPB’s targets might be running, too.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.