The Most Hated Financial Regulatory Agency

The Consumer Financial Protection Bureau was created in the wake of the financial crisis to ensure that banks and other financial services companies don't take advantage of consumers. But there are certain aspects of the regulatory agency that make it especially controversial.

Listen in to this week's episode of Industry Focus: Financials to learn what about the CFPB makes it so unpopular not only among policymakers but also throughout the financial services industry.

A full transcript follows the video.

This podcast was recorded on Feb. 13, 2017.

Gaby Lapera: Let's talk about something that people are very upset about: the Consumer Financial Protection Bureau, which was created with Dodd-Frank. The Consumer Protection Financial Bureau is something that's very new in America, at least in banking regulation, it's a regulator that has the consumer's best interests at heart, as opposed to regulators who are looking at banks and telling them, "We really want you to make sure you succeed, we don't want you to fail, here are the things we need you to do so you don't fail." This is another regulatory agency that's saying, "That's great and all, but you need to keep the consumer's best interests in mind as well."

John Maxfield: And if you think about where it fits into the regulatory structure, you have the three Prudential Regulators. Those are the Federal Reserve, the FDIC, and the OCC, which is the Office of the Comptroller of the Currency. To your point, their primary duty is to oversee banks and make sure that the banking system is safe and sound. The CFPB is a totally different entity. It opened its doors and 2011, so it's been around for a little over five years. And as opposed to being motivated by the desire to make sure that the banking system, overall, is safe and sound, its primary focus is on consumers. This all goes back to the abuses that were uncovered in the mortgage industry in the lead-up to the financial crisis.

Lapera: Yes. And I just want to put something out there. You might be asking yourself right now: Why would anyone be upset about more consumer protections? And I don't think anyone is upset about more consumer protections, except banks. But the agency, the way the bureau is structured, it could be a little bit better, both for banks and for consumers, and for the government. Do you want to get into that, Maxfield? I know I cut you off, and I think you were about to get in there, but I wanted to preface that.

Maxfield: I'm really glad you prefaced that, because what I'm about to say is going to sound very critical of the CFPB, but I think the CFPB is a really important entity. Let me give you a tangible example of why. Before the financial crisis, before the CFPB came into place, the way that banks charged overdrafts on your checking account, here's what they would do: if you had a bunch of charges in a single day, let's say you had five charges for five cups of coffee at Starbucks, but then you had your mortgage payment that came out of that account, and let's say you bought those five cups of coffee and you had those five transactions earlier in the day, and then your mortgage payment was the last transaction that day, and let's say that mortgage payment kicked your account into overdraft territory -- so, you would have an overdraft fee on that transaction -- what the banks would do was, they would rearrange the order of those transactions, and they would put that mortgage transaction first. So, what happened there is that, as opposed to having one overdraft charge, you would have six overdraft charges. So, that is the type of thing that the CFPB was put into place to stop, because it's just egregiously taking advantage of consumers.

Lapera: Definitely. That's called debit re-sequencing, by the way, and I believe the CFPB has pursued a few cases, and there have been a few class action lawsuits about it, but it's technically still not illegal -- fun fact I learned the other day.

Maxfield: That's exactly right. It's not technically illegal. But the CFPB has gone after it, and banks have really backed off from it. But, to your point, the reason the CFPB is so controversial, there are two overarching reasons. The first is that, unlike the other Prudential Regulators who have to balance the impact of their policies on economic growth, the CFPB doesn't have to do that. We've talked about the role that banks play in the economy on this show many, many times. But banks provide fuel for economic growth. So, if you are cutting off the banks that fuel, you are going to impact economic growth. So, it's really important that these regulatory agencies are taking into consideration, in the CFPB's case, both protection for consumers, but also, you don't want to cut off your nose to spite your face by impacting the economic growth, because that will boost up unemployment, which will hurt those same consumers. You know what I mean? 

Lapera: I think one of the things you're getting at here is that since the advent of the Consumer Financial Protection Bureau, banks have done stuff like been much more conservative about who they lend money to. And on the surface of this, you may think "Great, that's what they should be doing. They should be conservative lenders." But, on the flip side of that, you have this population of people who are already underserved by banks, who maybe don't have the best credit, but if banks were willing to work with them, maybe they would be able to get a loan and pull themselves out of poverty, whatever it is -- but banks don't want to lend to them anymore, because they know someone will come after them and say, "Look at all this untrustworthy lending you've been doing." And that pushes those people to the margins of the banking and financial structure, so they end up going to places like check cashers or payday loan places, places that potentially don't have as much interest in keeping the consumers above board.

Maxfield: Or, any interest in keeping them above board. [laughs]

Lapera: Yeah, or keeping them afloat in terms of financial things. Check cashers charge their fees up front, so if you fail, they don't really care, because they already have their money. But banks have an interest, in theory, in keeping you as a customer for a long time. In theory.

Maxfield: That's right, in theory. [laughs] And there's a lot of truth to that, but there are certainly exceptions on the margin. Let me get to that second reason that the CFPB is so controversial. Unlike the other regulatory agencies -- at the FDIC, there's a board of governors, there are five governors that weigh in on the policies, and the same thing is true at the Federal Reserve, which has the Board of Governors, and at the OCC, the head of the OCC, he reports directly to the President. So, there is either a dispersion of authority at these organizations, or there's accountability directly to the political branch. The problem that the CFPB has is that it's a part of the Federal Reserve, which is an independent entity within the executive branch for monetary policy reasons. That provides one layer of insulation between the CFPB and the political branch.

But there's an additional problem -- the CFPB is run by one person, not by a board. I don't want to overstate the case, but it's more like a dictatorship as opposed to a parliamentary democracy. You know what I mean? So, that has people concerned. And then on top of that, because the CFPB can go out and find these banks a ton of money -- in the five-plus years it's been around, it's collected something like $12 billion worth of fines, which means that it doesn't have to be accountable even to the Federal Reserve for financing or to Congress for financing. It can produce its own revenue. So, there's this concern that, they don't balance economic growth, they're non-accountable, they can basically do whatever they want. And, in fact, a court has, just last year, held that the governance structure is unconstitutional, and that will probably make its way up the chain of appeals courts. But, it really is a legitimate concern, how this thing is structured.