Just 15 months into its existence, the federal government’s newest consumer watchdog agency faces an uncertain future.
To President Barack Obama, the Consumer Financial Protection Bureau is a signature accomplishment of his term and concrete proof of his administration’s commitment to financial reform. “No longer are consumers left alone to face the risk of unfair or deceptive or abusive practices – not anymore,” the president said during a visit to the fledgling agency earlier this year.
His Republican rival, Mitt Romney, sees the bureau as a prime example of government run amok. Romney has condemned it as “perhaps the most powerful and unaccountable bureaucracy in the history of our nation.”
Their contrasting visions for the bureau illustrate the stark differences in the candidates’ approaches to financial regulation and consumer protection in the aftermath of the 2008 economic crisis.
The bureau was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which bestowed the agency with oversight and regulatory powers over mortgages, credit reporting, debt collection and payday loans, among other consumer financial products and services. It has a budgeted cap of $598 million from the Federal Reserve (though it expects to spend about $448 million) and a staff of about 950. Obama recess-appointed bureau director Richard Cordray in January over Republican objections.
As of last month, the agency’s Consumer Response Center had received 80,000 consumer complaints about credit cards, bank accounts, mortgages and other consumer loans. Its first three major enforcement actions against Capital One Bank, Discover and American Express have resulted in a total of $435 million in refunds for nearly 6 million customers, in addition to $101 million in penalty fees.
The bureau also has issued fact sheets and online education tools as part of its “Know Before You Owe” campaign to make home loan applications and student financial aid packages more transparent, started supervising credit reporting agencies for the first time, and proposed new rules to reform the mortgage market.
The agency is “already showing in really meaningful ways the benefits that it can provide to consumers,” said Brian Deese, deputy director of the National Economic Council at the White House.
Romney has said he wants to “repeal and replace” the Dodd-Frank Act if elected. For the consumer bureau, that likely would mean restructuring rather than closure.
Romney’s economic policy director, Pierce Scranton, said the Republican nominee believes the bureau should be held more accountable by subjecting it to congressional budget approval and oversight, and that some of its powers need to be linked or transferred to prudential regulators that oversee the safety and soundness of financial institutions.
“It’s certainly on the table that the powers of the CFPB would be reallocated, but I don’t think that we’re saying anything that would be interpreted as completely dissolving the CFPB,” Scranton said.
Romney also supports changing the bureau’s governance structure from a single director to a commission or board of directors, similar to comparable agencies such as the Securities and Exchange Commission or the Commodity Futures Trading Commission, Scranton said. “I think you find in a commission structure that in all of those agencies, it’s a composition of people representative of diverse views, versus one person who has an extraordinarily large amount of power to wield,” he said.
The regulation that has come out of the bureau so far has been inefficient and burdensome, Scranton said.
“I think it’s added such a burden and such confusion that people don’t even know what they’re supposed to comply with, and that’s particularly hard if you’re a smaller institution and you don’t have an army of lawyers to tell you how to do it,” he said.
Consumer advocates say such changes proposed by Romney’s campaign and opponents of Dodd-Frank in Congress would gut the agency.
“After years of banks engaging in all sorts of bad behavior that essentially broke our economy, the notion that this agency that’s just getting started would be broken up and its powers turned over to the regulatory agencies that failed miserably in the lead-up to the economic crisis is just absurd,” said Ira Rheingold, the executive director of the National Association of Consumer Advocates.
Financial services have a huge impact on people’s lives, and if companies aren’t responsible in selling these services, it can lead to global disaster, as it did in 2008, said Linda Sherry of the nonprofit Consumer Action. “I think it’s pretty amazing what short-term memories people have up in Congress.”
In particular, tinkering with the bureau’s funding could do a lot of damage, Sherry said. Consumer advocates lobbied hard to secure an independent funding stream from the Federal Reserve rather than Congress so that the bureau would be insulated from political pressures and special interests, she said.
“That would be a real crushing blow if it was in any way funded by the people it regulates,” Sherry said. “The fox guarding the henhouse model is not good for any industry, and it would be especially damaging in this situation.”
Bankers, on the other hand, warn that an unchecked consumer bureau could have a chilling effect on lending and on the economic recovery.
The more legal and regulatory compliance costs go up, the fewer loans banks will make, said Max Cook, president and chief executive officer of the Missouri Bankers Association. Cook said his association’s 325 member banks are scrambling to interpret and respond to some 4,000 pages of new regulations proposed by the bureau.
“If you take the sum total of all of those proposals, it’s pretty overwhelming, particularly for the smaller institutions, the community banks like we have in Missouri,” he said.
In the end, consumers are the ones who lose, Cook said.
“If you take a one-size-fits-all approach to regulation, then you’re always going to have unintended consequences and fallout and added cost,” Cook said. “All of that comes back to haunt the consumer. So I think you really have to take a measured approach to all this and be careful.”