How Consumer Financial Protections Could Be Rolled Back
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Discussions have begun in the House to roll back Obama-era regulations aimed at protecting consumers and investors from financial wrongdoing.
A bill introduced recently by Jeb Hensarling (R-Tx), chairman of the House Financial Services Committee, takes particular aim at the powers of the Consumer Financial Protection Bureau (CFPB), the watchdog agency created by Dodd-Frank financial regulations.
Among other measures, the bill would limit the CFPB's independence, including its ability to issue consumer-protection rules and supervise the financial institutions under its purview.
The Financial CHOICE Act, as the bill is called, would require the CFPB to get congressional approval before issuing any new financial regulations. It also would switch how the agency is funded. The CFBP would now get its money through congressional appropriations rather than directly from the Treasury Department.
The measure could pass the House in some form before the August recess. But as written now, its fate in the Senate is doubtful.
The CFPB has been controversial since it was created in 2011, so it's no surprise that this latest effort to curb its powers is provoking sharply contrasting views.
"The CHOICE Act greatly improves the status quo," said Norbert J. Michel, senior research fellow of financial regulations and monetary policy at the conservative Heritage Foundation, and one of seven experts who testified at today's hearing. "But no compelling case can be made that a new federal agency was—or is—needed to protect consumers from financial fraud," he maintained. "Ultimately, Congress should elmininate the CFPB."
Consumer advocates disagree. They defend the agency and think efforts to undo it are politically motivated.
“The level of venom directed at the Consumer Financial Protection Bureau, an agency that is successfully carrying out its mission of preventing tricks and traps that harm American families, is astounding,” said Lisa Donner, executive director of Americans for Financial Reform, a nonpartisan and nonprofit coalition of consumer and other citizen groups. “The changes proposed by the legislation only make sense if you want to weaken consumer protections and make it easier for Wall Street, and predatory lenders, to profit by cheating people.”
Undoing Dodd-Frank
The CHOICE Act, a rewritten version of another Hensarling bill proposed last fall, is a wide-ranging riposte to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, itself a response to the economy's near-collapse in 2008 and 2009. Many of its provisions are intended to roll back regulations and new agencies established by Dodd-Frank that some deem onerous or unnecessary.
Among the bill's biggest innovations is a measure that would allow Congress to block any major financial rule put forth by a federal agency. Both houses would now have to approve the rule within 60 days of its introduction. Either house could effectively kill it by not moving on the rule at all.
That means either house could effectively kill a rule by not moving on it at all, according to Barbara Roper, director of investor protection for the Consumer Federation of America in Washington, D.C. "If you get a rule that an industry group opposes, they can get their friends in Congress to let it get sidelined," she says.
CHOICE also requires federal financial agencies promulgating a rule that would affect state and local governments or the private sector to the tune of $100 million or more a year to select the least costly and "least burdensome" alternative. The bill would also let state and local governments and the private sector provide input on any significant mandates.
That, too, could stall rules from moving forward, Roper says.
Impact on the CFPB
The bill's renaming of the Consumer Financial Protection Bureau to the Consumer Financial Opportunity Agency is a sign of how House Republicans intend to shift the entity's direction. Several measures curb the agency's current ability to make and enforce consumer protection rules and punish those who break the rules. Among them:
• The consumer agency would have no power to punish wrongdoers. The new agency would have no authority to call out and punish financial institutions for unfair, deceptive, or abusive acts or practices. For example, a restructured CFPB would not have been able penalize Wells Fargo, which admitted last year to opening more than 2 million unauthorized deposit and credit-card accounts in the names of customers. The agency ordered the bank to pay full restitution to all victims and a $100 million fine to the CFPB’s Civil Penalty Fund; $35 million penalty to the Office of the Comptroller of the Currency; and $50 million to the City and County of Los Angeles.
“This bill would render the CFPB virtually powerless and leave families vulnerable to unfair and abusive financial practices," says Pamela Banks, senior attorney at Consumers Union, the policy and mobilization arm of Consumer Reports.
Critics of the current CFPB structure and its current director, Richard Cordray, say the agency unfairly goes after financial companies for abusive behavior without defining what "abusive" means. "CFPB officials have not shown much willingness to provide clarity," Michel says. "Under this framework, financial firms must operate under a vague legal standard to which they might never be able to adhere."
• The director could be easily removed. The agency's director would be appointed by the President, as happens now. A new, deputy director position would be created; that person would be a Presidential appointee as well. But unlike with other banking regulators, the President could remove both individuals at will, for any reason.
Supporters of the current structure, in which the director can only be dismissed for cause—such as incompetence or financial malfeasance—say it allows the director to be politically independent. While the director must provide regular reports to Congress, opponents say current rules leave the director too much unchecked power.
"Anything would be better than the lack of accountability that we have now," said John Berlau, senior fellow of the Competitive Enterprise Institute, a Washington-based libertarian think tank.
• The agency would have no authority over small-dollar lenders. The CFPB would have no control over the issuers of problematic payday loans, vehicle title loans, and other similar loans. "The legislation is silent over who would have jurisdiction over these," Consumer's Union's Banks says. The Federal Trade Commission might have some control over deceptive advertising and that other federal financial regulators might have some responsibility, but it's less than clear. Prior to the establishment of the CFPB, those agencies did more on the safety and soundness of the industries they supervised, but very little on consumer protection, Banks notes.
• Consumer complaints would not be made public. The CFPB's Consumer Complaint Database, which currently includes more than 1 million consumer gripes, would continue to exist but would no longer be viewable by the public. The database is currently available to any consumer who wishes to make a complaint against a bank, credit bureau, credit-card issuer, student-debt processor, or other financial services company under the CFPB's purview. Those industries maintain that because the complaints aren't fully vetted to determine their accuracy, they shouldn't be published.
Consumer advocates counter that the CFPB does check that the person making the complaint had a relationship with the institution, and that consumers typically complain to the agency only after they have failed to get resolution by complaining directly to the company. "The benefit to consumers is, if a company gets a complaint from the CFPB, they must respond," Banks noted. "A consumer can't require that on his own."
What's Next
The bill is tentatively scheduled for "markup" next week in committee, allowing for introduction of amendments from both sides of the aisle. Ranking Member Maxine Waters, D-Ca., has called for another hearing on the bill, which observers say probably would happen in the following weeks. The bill is expected to reach the House floor in mid-May.
As written, though, observers say the heavily partisan, 593-page bill probably won't become law. In the Senate, it will need a 60-vote majority to pass, which would require cooperation from Democrats unlikely to support it in its current form, notes Isaac Boltansky, director of policy research at Compass Point Research & Trading, a investment firm based in Washington, D.C. While some aspects of the bill that deal with systemic banking changes could pass muster, he said, the CFPB's restructuring isn't likely to be accepted by the Senate.
"We expect House passage prior to the August recess," Boltansky said, "but the Senate will ultimately determine the fate of legislative regulatory reform."
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