This article appears in the Summer 2017 issue of The American Prospect magazine. Subscribe here.
It began by comparing a mortgage and a toaster. That's how then–Harvard Law School professor Elizabeth Warren made the case for a government consumer financial protection agency akin to the Consumer Product Safety Commission created under President Nixon in 1972. Warren's 2007 article “Unsafe at Any Rate,” a reference to Ralph Nader's 1965 book Unsafe at Any Speed, planted the seed for what would later become the Consumer Financial Protection Bureau (CFPB), an agency charged with making “consumer financial markets work for consumers, responsible providers, and the economy as a whole.” Her persuasive argument made the need for such an agency crystal clear to ordinary consumers:
It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street—and the mortgage won't even carry a disclosure of that fact to the homeowner. Similarly, it's impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?
The financial crisis of 2008 presented the perfect opportunity for Warren's idea to take hold. The crisis revealed gaps in the regulation of financial products and services that left consumers exposed and vulnerable. When Congress debated how to respond, consumer protection issues emerged as a clear theme. Such practices as subprime mortgages were not just problems for individual consumers; they contributed to systemic risks that led to the near collapse of the economy. The protection of consumers was therefore integral to financial reform. So Congress had good reason to establish the CFPB when it passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
In its short life, the agency's enforcement actions have returned nearly $12 billion to 27 million consumers who were bilked by financial services firms engaging in illegal practices. The CFPB has outlawed the practice of directing mortgage-seekers to high-interest loans, cracked down on unscrupulous student loan providers, and created a division dedicated to dealing with consumers' complaints, handling over one million grievances to date. Despite these accomplishments, our nation's newest federal agency faces challenges to its power and very existence.
The Republican Rollback
On February 3, Donald Trump signed the Presidential Executive Order on Core Principles for Regulating the United States Financial System, putting the first nail in the coffin of an agency that had the support of both the Bush and Obama administrations. While the order promised to “empower Americans to make independent financial decisions and informed choices in the marketplace,” the White House signaled Trump's intention to roll back an “unaccountable and unconstitutional new agency that does not adequately protect consumers,” as Press Secretary Sean Spicer described the CFPB.
Department of Labor/Public Domain
When the president signed that executive order, his chief economic adviser, Gary Cohn, stood right behind him. This is the same Gary Cohn who presided over an imploding Goldman Sachs in 2007. Cohn is one of five former Goldman Sachs executives who have top posts in the Trump administration.
Bank stocks jumped in response to the executive order, a sign of who stands to benefit from a relaxation of the rules. A few days later, on February 6, a leaked memo from Representative Jeb Hensarling, chairman of the House Financial Services Committee, detailed plans for a bill called the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act. Hensarling's legislation would neuter the CFPB by weakening its leadership and limiting its enforcement tools, denying it the ability to audit financial practices. The bureau would be able to act on wrongdoing only after it came to light through other investigations or channels. The CFPB's ability to make rules like those that now govern the banking and consumer credit industry would also be severely limited. Big banks would only have to undergo a stress test exercise every two years, rather than annually as they do now.
Trump targeted Dodd-Frank early in his campaign, telling Reuters in May 2016 that the law “has made it impossible for bankers to function.” At the same time, he pilloried Hillary Clinton for cozying up to Wall Streeters, asserting that they had “total control” over her. The 2016 Republican Party platform called the CFPB a “rogue” agency that should be eliminated.
If Congress passes legislation neutering or killing the CFPB, this won't be the first reversal of financial regulation in the past century. In 1933, Congress passed the Glass-Steagall Act, preventing banks from engaging in both investment banking (what Wall Street does) and commercial banking (what smaller, more local banks that take deposits typically do). Risky investments had led to the stock market crash in 1929, and the law was designed to minimize banks' ability to take such risks. But, in 1999, the Gramm-Leach-Bliley Act once again permitted banks to engage in both commercial and investment activities, effectively nullifying Glass-Steagall. The legislation allowed commercial banks, investment banks, securities firms, and insurance companies to merge and grow, and the industry became increasingly consolidated.
In the early 20th century, Woodrow Wilson and Supreme Court Justice Louis Brandeis warned against dangers stemming from the growth of banks' and bankers' self-interested business practices. Brandeis maintained that the financial services system played a different role than other corporate sectors do. The role of finance, he argued, is more like that of a utility, providing essential services for the functioning of the economy, and banks should therefore be required to abide by a different set of rules. Sometimes Brandeis's arguments have been heeded and sometimes not: The pendulum has swung back and forth as to whether government should require banks to do more to serve all of us equally in exchange for the economic benefits they get from government. The Federal Deposit Insurance Corporation (FDIC), for example, insures the deposits we keep at banks, up to a limit of $250,000. If banks fail, as they did in 1929, most of us won't lose our money. Banks also benefit from low-cost loans from the Federal Reserve. Shouldn't they be required to reciprocate the public's largesse?
How We Got the CFPB
The inclusion of the CFPB in the Dodd-Frank legislation was hardly a slam dunk.
“The bureau seemed like it was on its last legs politically several times during the Dodd-Frank deliberation,” says Raj Date, managing director at Fenway Summer Ventures and one of the first people to work on getting the CFPB up and running.
Even Representative Barney Frank, who chaired the House Financial Services Committee at the time and was one of the chief architects of the legislation, didn't initially see the consumer protection agency as part of the new law. But Frank's counterpart in the Senate, Chris Dodd, did want it included, and Frank changed his mind after he appeared with Warren at a forum where she presented her agency idea. While sharing a ride to the airport, Warren seized the opportunity to make her case. “He was trapped in the car,” she recalled. “And I'm relentless.”
Throughout the congressional debate, the proposal for the new agency continued to face intense opposition from inside and outside the government, especially from the banks, which argued that it targeted them unfairly. Supporters of the CFPB skillfully used the financial crisis to pass legislation they thought was long overdue. Other legislators who wouldn't have dreamed of supporting it before the crisis knew they had to show their constituents that they were doing something to curb the banks. Public-opinion polls showed that voters wanted policymakers to take a strong stand. Last-minute changes to the legislation, such as an amendment limiting how much money banks can make from retailers for debit-card processing, distracted the bank lobby from the CFPB at a critical moment. And so, against all odds, Warren's idea became a reality.
Consumer Financial Protection Bureau/Public Domain
Before the creation of the CFPB, six federal agencies—the Federal Reserve, FDIC, Securities and Exchange Commission, the National Credit Union Administration, the Federal Trade Commission, and Office of the Comptroller of the Currency—played different roles in regulating the financial services industry. Did we really need another federal regulatory agency? Add in the state regulators that were the only check on many nonbank financial services such as check cashers and payday lenders, and you get a complex, uneven, and opaque regulatory environment.
The CFPB differs from the other agencies in two critical respects. First, its core mission is consumer protection, a function that has been peripheral at other agencies. Simply put, the CFPB focuses on people. It has absorbed the parts of other federal regulatory agencies charged with consumer protection in order to establsh a single set of regulations that the entire financial industry has to follow. In a speech introducing the idea of the new agency, President Obama declared that the CFPB would have “just one job: looking out for ordinary consumers.” If you haven't spent much of your time knee-deep in bank regulation, this may not seem like such a big deal. But nearly every industry insider calls this moment profound.
The second difference between the CFPB and the other federal regulatory agencies is that it is the only agency that has jurisdiction over the entire universe of consumer financial services providers—banks and nonbanks. Before the creation of the CFPB, many of these nonbank financial services providers such as payday lenders, auto loan lenders, and check cashers were not subject to consistent national regulations, resulting in a patchwork of different rules across the country. The agency was established to create a level playing field for the entire range of consumer financial services providers, including mortgage brokers and private student lenders. It was the most significant expansion of federal financial regulation in decades.
Getting to Work
To set up the new agency, Obama turned to Warren, who had previously chaired the Congressional Oversight Panel that oversaw the Troubled Asset Relief Program (TARP), a key part of the federal response to the financial crisis. As an assistant to Obama and special adviser to the Treasury, Warren assembled a small team at Treasury to organize the CFPB.
It's not every day that a new federal bureau is created. Dodd-Frank established goals with ambitious deadlines for the agency, making it essential to move quickly.
Building the agency from the ground up gave it the feel of a start-up.
Early hires, eager to be part of something new and important, met in the elevator lobby for Warren's daily pep talks.
The creation of the agency was also something of a merger. Raj Date, the CFPB's first deputy director, reflects: “We were, after all, putting together authority gleaned from six, seven different agencies, and staff from six or seven different federal agencies plus the Department of Justice, plus the White House, plus a bunch of high-profile state agencies. Usually in a post-merger environment you know who's buying whom. This was just a lot more difficult.”
Warren's charismatic personality and skills as a recruiter drew impressive talent, but her tone also alienated lifetime bureaucrats who were brought in from other agencies. Her publicly expressed interest in hiring “new, young staff” made veterans feel that their experience wasn't valued. The aggressive deadlines, high proportion of ambitious go-getters with no government experience, and consensual mode of making decisions differed radically from the management styles to which older officials were accustomed. In only 17 months, the CFPB went from zero to 1,073 employees, warp speed for a government agency.
Although Warren was the obvious choice to be the agency's first director, her penchant for straight talk and reputation for attacking big banks rankled too many in both industry and the government. Obama's decision not to nominate her was a blow to the agency's supporters and an early win for its opponents, though the decision ultimately proved a blessing in disguise for Warren when she ran for the Senate in Massachusetts and won a national platform. In place of Warren, Obama nominated Richard Cordray, who was already serving as the bureau's chief of enforcement. Previously attorney general of Ohio, Cordray had recovered more than $2 billion for consumers from financial predators. But despite his less-controversial profile, it took two years for the Senate to confirm him, slowing the agency's work since it needed a confirmed director to perform key functions such as supervising nonbank entities.
AP Photo/Andrew Harnik
Since being confirmed, Cordray has been an effective leader. New standards set by the CFPB for the mortgage market in 2013 required lenders to verify borrowers' income and their ability to repay loans and discouraged high-risk mortgages, such as offers boasting introductory “teaser” rates. In October 2015, the agency mandated lenders to simplify the disclosure agreements that borrowers sign when they take out a loan. These moves earned high praise from consumer advocates and financial journalists.
Student loan programs have been another focus of CFPB's efforts. A report issued in May calls for federal student loan programs to undergo significant modification in order to focus more on economically vulnerable borrowers. Earlier this year, the agency sued Navient, the nation's largest provider of federal and private student loans “for systematically and illegally failing borrowers at every stage of repayment” by providing incorrect information, misprocessing payments, and failing to respond to borrowers' complaints. According to the CFPB, Navient deliberately steered struggling borrowers away from lower repayment options, causing them to overpay for their loans. When Navient sought to have the case dismissed in court, it declared, “There is no expectation that the servicer will act in the interest of the consumer.” Navient also sought to undercut the lawsuit by arguing that the CFPB is unconstitutional. Unsurprisingly, CFPB data show that Navient ranks seventh on a list of the nation's most complained-about financial companies.
Much of the CFPB's work concerns “financial justice,” a term that has only recently become part of the political lexicon, even though racial minorities have always had less access to affordable financial services and lenders long targeted African Americans at higher rates than whites for debt collection. In its effort to hold financial services firms accountable for racially discriminatory practices, the CFPB fined American Honda and Toyota $24 million and $21.9 million respectively for practices that led minority borrowers to pay higher interest rates than white borrowers for auto loans, without regard to the borrowers' creditworthiness.
In June 2016, the bureau announced a joint action with the Department of Justice against BancorpSouth Bank for discriminatory mortgage-lending practices that harmed African Americans and other minorities. The complaint alleged that BancorpSouth engaged in numerous discriminatory practices, including illegal redlining in Memphis and implementing an explicitly discriminatory loan-denial policy. The bank settled the case for $10.6 million. The CFPB also focuses on protecting other at-risk groups from illegal financial practices through its offices for older Americans and members of the armed services and veterans.
The CFPB has broadened the discussion of financial inclusion, shifting the focus from whether consumers have a bank account to whether they are financially healthy. To that end, the agency has created a financial well-being scale, which measures four attributes of financial health: control over one's finances, capacity to absorb a financial shock, having financial goals and being on track to meet them, and being able to make choices that allow one to enjoy life. The CFPB has created a questionnaire and scoring sheet to be used by researchers and practitioners to better assess consumers' financial health and to target particular deficits. This change in emphasis from being banked to being financially healthy helps to illuminate how challenging it is to achieve financial well-being in an economy characterized by slow-growing wages, an increase in income volatility, and reduced job-based benefits and public social provision.
Fighting for Survival
Debates about the CFPB, like practically everything else about government, have become increasingly polarized.
Despite some initial bipartisan support for the bureau, Republicans have been trying to weaken it since its inception.
The CFPB is an “independent bureau” overseen by a director with a five-year term, who is removable by the president only “for inefficiency, neglect of duty, or malfeasance in office.” Although no evidence supports such claims about Cordray, rumors about his imminent sacking flooded the internet shortly after Trump took office. A number of conservative columnists called for his firing, and others speculated that dismantling the CFPB would be a top priority for the new administration. Congressional Republicans have been working to build a case against Cordray, claiming that some of his regulatory and enforcement decisions overstep his mandate.
On April 5, the House Financial Services Committee held a five-hour hearing at which Cordray was the sole witness. Hensarling opened the hearing by arguing that Cordray was responsible for making “credit more expensive and less available in many instances” and that “the record is replete with instances where [the CFPB] has abused or exceeded its statutory authority.”
Aude Guerrucci/picture-alliance/dpa/AP Images
Cordray, whose term ends in the middle of 2018, has shown no inclination to quit despite rumors that he plans to run for governor of Ohio. At a January 2017 event hosted by The Wall Street Journal, he maintained that Trump's election has no effect on his job. “We have an independent mandate to do what we do and we'll continue working to protect consumers,” he said.
At this point, Cordray seems unlikely to be sacked, but the CFPB could be disempowered in other ways. One strategy under discussion among conservatives would be to change the agency's structure, replacing its sole director with a small commission. Roland Brandel, a consumer financial services lawyer and supporter of this move, argues that the “give and take of those commissioners should result in decisions superior to those that would be made by a single director,” while opponents maintain that a commission model would be a recipe for inaction. The Federal Election Commission is a notorious example of a perpetually paralyzed agency; other independent commissions, such as the Federal Communications Commission, have a majority from the party that occupies the White House and usually act in line with the president's views.
The second way detractors aim to diminish the agency's power is to change its funding. The budget for the CFPB curently comes from a designated fund generated by the Federal Reserve System, independent of the congressional appropriations process. Opponents want to put the CFPB's budget into the appropriations process and thereby give Congress direct control. That's the easiest way to kill a regulator, and it's been done before. The Consumer Product Safety Commission, the Federal Trade Commission (FTC), and the Securities and Exchange Commission have all been subjected to congressional budgetary control. Ellen Seidman, a senior fellow at the Urban Institute, believes this change would be much more damaging to the CFPB's work than altering its leadership structure. “Making the CFPB subject to congressional appropriations could be deadly,” Seidman says. “The FTC and CPSC were powerful agencies that have been essentially neutered by not getting sufficient appropriations.”
There is plenty of evidence that the work of the CFPB is far from done. Despite the more intense scrutiny of financial services since the 2007 crisis, illegal and unethical behavior in the industry has continued. In 2015, the CFPB ordered Citibank to refund $700 million to consumers and pay $70 million in fines for illegal and deceptive credit card practices, and in 2016 the agency fined Wells Fargo $100 million for opening sham accounts. The CFPB also ordered TransUnion and Equifax to pay fines for deceiving consumers about credit scores and credit products.
It took Congress 66 years to undo Glass-Steagall in 1999. It may take less than a decade to undo the reforms brought about by Dodd-Frank, including the CFPB. Republicans may kill the agency entirely or neuter it through structural and budgetary changes, or they may just wait for Trump to replace Cordray and weaken it from within—unless consumer and resistance groups make the strength and survival of the CFPB a major public issue. Whatever happens in the short run, the CFPB will have demonstrated the value of clear-headed and determined consumer financial protection.
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