Although it's fun to think that under capitalism, the market is truly efficient, humans throw a kink into the works every time. This is why the Consumer Financial Protection Bureau (CFPB) exists. It's there to make sure that the people actually involved in the economy are treated fairly and have a way to push back against things like unfair financial practices.
What is the Consumer Financial Protection Bureau?
The Consumer Financial Protection Bureau is a United States government agency that is tasked with policing banks, lenders, and other financial institutions to ensure that they're playing fair and by the rules.
It does this by receiving consumer complaints, investigating them, enforcing laws related to said consumer complaints when applicable, and keeping track of consumer experiences with these flagged financial products or facilities. The CFPB also watches the financial markets for new products or fees that could pose a risk to consumers before they're even launched.
Why was the Consumer Financial Protection Bureau created?
The CFPB was founded in the wake of the 2007-2008 financial crisis that snowballed into the Great Recession as a push-back against a lot of very dodgy practices in banking and lending that were in a deeply gray legal area. These practices hurt a lot of Americans, caused many to lose their homes or their savings, and some even directly contributed to the real estate crash of that period.
The Dodd-Frank Act was passed in 2010, and with its passing came the establishment of the CFPB in 2011. This took the work of several agencies that oversaw banking and lending in a scattershot sort of way and put it all under one roof, where everyone involved could be aware of the kinds of enforcement actions that were taking place at any given time.
What does the Consumer Financial Protection Bureau do today?
Today, the Consumer Financial Protection Bureau is still involved in enforcement, but that's not all it does. Its tasks are focused both on directly protecting consumers and on educating them so they're not so easily taken advantage of by institutions they believe they can trust. The agency's main tasks include:
- Rulemaking and enforcement: Perhaps the role it's best known for, the CFPB makes rules about banking and lending, including things like how much a credit card can charge in late fees, and enforces them using both direct action and financial penalties via the court system.
- Supervision: The CFPB is tasked with keeping a watchful eye on large banks (including those "too big to fail") and nonbank financial companies, such as payday lenders, to ensure they're behaving ethically and fairly.
- Consumer education: Although it's important to enforce rules around banking and lending, it's equally important to educate consumers on both what they should expect and their rights when it comes to financial services. This helps prevent abuse by arming the public.
- Complaint handling: With educated consumers and rules that are enforceable, the CFPB is the best place to handle consumer complaints when a bad actor appears. It also tracks these complaints to detect patterns of abuse or industry-wide problems.
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Why does the Consumer Financial Protection Bureau matter to investors?
The Consumer Financial Protection Bureau may not seem like an agency that should matter too much to investors, but believe it or not, it protects you, too. Not only does it ensure that financial institutions like your brokerage are on the up-and-up, but it can also collect complaints that may result in changes to how financial institutions collect fees or rules around how those fees are paid.
This allows you to go in with more trust as a customer and to feel a little better about any investments you make in financial institutions, since you know someone who has real power to change behavior is policing them. Of course, if you know going in that a financial institution has unethical practices, it's better to simply not invest in them. But sometimes, you don't know these things until it's much too late.
The CFPB can help you sleep better at night if a bank you're invested in is suddenly in the news for charging too many late fees or applying payments incorrectly to their credit card accounts.
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