Battle lines drawn: As legislation aims to revamp the regulator, advocates square off over the soul of consumer finance regulation.
The Consumer Financial Protection Bureau (CFPB) is tasked with regulating consumer financial products and services. Since its inception in 2011, the independent agency has faced scrutiny and calls for reform from Republican lawmakers who argue it lacks proper oversight and accountability.
In recent years, several pieces of legislation have been proposed to change the CFPB’s structure and operations. In March 2023, the U.S. Finance Committee held a hearing on “Consumer Financial Protection Bureau: Ripe for Reform.” to explore this issue in greater detail.
This blog post analyzes these reform proposals, examining both their stated goals and potential implications and the debate surrounding efforts to modernize the CFPB’s mandate.
Criticism of the CFPB’s Structure
The structure of the Consumer Financial Protection Bureau (CFPB) has been a topic of intense scrutiny, particularly among Republicans who have been critical of the agency’s independence as an independent agency headed by a single director. The argument is that such a structure gives the director unchecked power without proper oversight since the director can only be removed for cause and not at the president’s will. The level of independence enjoyed by the CFPB also removes it from the accountability that comes with being subject to congressional appropriations.
Aside from criticisms of the CFPB’s structure, there are concerns about some of the agency’s regulatory actions. One such action is the restriction of specific “junk fees” charged by financial institutions like banks and credit card companies. While this move is seen as a consumer-friendly action, critics argue that it oversteps the CFPB’s authority and could negatively impact access to credit for some consumers by reducing revenue sources for lenders.
Another criticism directed at the CFPB is its alleged disregard for the costs and benefits of new regulations. Critics argue that the agency’s focus on consumer protection often overlooks the potential negative economic effects of new regulations, particularly on small businesses and consumers. In light of these concerns, there have been calls for a review of the CFPB’s mandate and regulatory approach to balance consumer protection and economic growth.
Proposal to Reform CFPB
At the hearing in the House, Republicans introduced legislation aimed at reforming the CFPB’s structure and operations:
- The CFPB Dual Mandate and Economic Analysis Act would broaden the agency’s mission beyond consumer protection. If passed, it would require the CFPB to consider how new regulations impact access to financial services and market competition. A key provision would establish an Office of Economic Analysis to thoroughly review all rules and ensure they do not unduly burden the industry or limit consumer choice.
- The CFPB-IG Reform Act seeks to increase transparency around the bureau’s activities. It would create an independent Office of Inspector General to oversee the CFPB. This Inspector General would have the authority to investigate concerns, perform audits, and report any findings of waste, fraud, or abuse directly to Congress. Supporters believe this could help address criticisms that the CFPB currently faces little meaningful scrutiny of its operations.
- The Consumer Financial Protection Commission Act takes a different approach by changing the leadership structure of the CFPB. Instead of a single director, it would replace the CFPB with a five-person bipartisan commission, appointed by the President and confirmed by the Senate. Backers argue this model could prevent any political ideology from dominating policy decisions. It also makes the agency less vulnerable to shifts whenever the presidency changes hands.
- The Federal Reserve Loss Transparency Act aims to subject the CFPB’s funding to greater oversight. Currently, the bureau receives funds through the Federal Reserve rather than the congressional appropriations process. This bill would prohibit money transfers to the CFPB if the Federal Reserve Banks are operating at a loss that year. It would also require the Fed to adhere to government accounting standards, increasing transparency around its finances. Supporters see this as a way to boost accountability over how the CFPB spends taxpayer dollars.
In late April 2023, the House Financial Services Committee voted along party lines to advance the bill. However, it has yet to receive a full floor vote in the House or be considered in the Senate. The Act’s future will depend on negotiations between the two chambers and a pending Supreme Court case on the CFPB’s constitutionality.
How Could the Proposal Alter the Financial Landscape
The package of legislative proposals seeking to reform the structure and operations of the CFPB would fundamentally change how consumer financial protection regulation is approached in the United States. By broadening the CFPB’s mandate, establishing independent oversight, converting to a bipartisan commission, and increasing budget transparency, the combined effect would be introducing more checks and balances into the agency’s rulemaking and enforcement activities.
This comprehensive reform is aimed to alleviate burdens placed on financial institutions, rein in any overreach of the CFPB’s authority, and ensure a more balanced consideration of impacts on both businesses and consumers. Adopting these changes is expected to help modernize the regulatory framework and restore confidence that the federal watchdog operates fairly and within legal boundaries.
Some cautioned that diminishing the power and independence of the CFPB could have unintended negative consequences for consumers over the long run. And that diluting the agency’s focus solely on consumer protection through a broader mandate may result in weaker rules that do not adequately guard against predatory practices or financial abuse. Additional layers of bureaucracy and budget constraints risk paralyzing the CFPB’s ability to swiftly investigate wrongdoing and issue new protections in a dynamic financial marketplace.
The debt collection and consumer lending industries argue reforms are needed to curb overregulation, while consumer advocacy groups counter this could weaken consumer protections.
How these complex trade-offs between oversight and agility are managed will have significant implications for shaping fair rules and oversight in the financial industry for years to come.