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12/18/2017

A Short History of the CFPB (article)


In July of 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This Act, in response to the financial crisis of 2008, included the creation of the Consumer Financial Protection Bureau (CFPB), an autonomous U.S. government agency tasked with ensuring that banks, lenders, and financial companies treat consumers fairly by providing greater protection and establishing rights to consumers of financial products.

In some ways the autonomy of the CFPB is unique. But in others it is similar to the Federal Reserve. The Fed’s goals and purpose—to establish maximum employment and stable prices—are set by Congress, but its funding and operation remain autonomous in order to prevent being swayed by political pressure. The thinking behind the CFPB’s structure was similar. The Bureau receives its money not through Congressional appropriation but from the Fed. The agency was given independence purposely so that it could proceed with its work without worrying about political retribution.

The entire premise for the creation of the CFPB is to protect consumers from financial predators and criminals. Existing government agencies have been in place for decades to monitor and regulate financial institutions. This approach fractionalized the regulatory role across various agencies. The CFPB consolidates government authority in regards to consumer protections into a single agency.

Since the inception of the CFPB there have been several high profile financial industry scandals within the financial industry, including the collusion and fixing of LIBOR interest rates by multiple banks and the creation of fraudulent bank accounts and loans in the name of bank customers. In its capacity as the sole consumer protection agency, the CFPB has brought many less visible yet purposeful actions. For example, just since August of this year the CFPB took action against the following:

  • Citibank, N.A. for student loan servicing failures that harmed borrowers.
  • Xerox Business Services, LLC, now called Conduent Business Services, for software errors that led to incorrect consumer information about more than one million borrowers being sent to credit reporting agencies.
  • Freedom Debt Relief, the nation’s largest debt-settlement services provider, and its co-CEO Andrew Housser for deceiving consumers.
  • Tempo Venture, Inc., doing business as Culpeper Pawnbroker, for deceiving consumers about the actual annual costs of its loans.
  • Top Notch Funding for lying in loan offers to NFL players, Deepwater Horizon victims, and 9/11 first responders.
  • American Express Centurion Bank and American Express Bank, FSB for discriminating against consumers in Puerto Rico, the U.S. Virgin Islands, and other U.S. territories by providing them with credit and charge card terms that were inferior to those available in the 50 U.S. states.

How the CFPB May Be Changing

It now seems that the purpose and role of the CFPB is in jeopardy. The transition from the Obama to the Trump administration in 2017 has ushered in Congressional pushback on regulatory activities in the financial sector. In October 2017, the U.S. Senate followed the House in striking down the CFPB’s “Arbitration Rule” aimed at removing the ability of “providers of certain consumer financial products and services” to require consumers to agree to arbitration in their contracts (such as credit card, cable TV and cell phone agreements) and barring the consumer from joining in a class action over any grievance that may arise under the agreement.

Now, the leadership of the CFPB is disputed following the resignation of Director Richard Cordray to prepare for a run at the governorship of Ohio. The Acting Director, Leandra English, the designated replacement according to the Act that established the CFPB, has been unseated by the President’s hand-picked appointed successor, Mick Mulvaney. Mulvaney, who currently also serves as director of the Office of Management and Budget, has openly expressed his dislike for the CFPB. Not surprising, his appointment has set off a legal battle of who is really in charge.

In early December, a federal judge held that the Vacancies Reform Act took precedence, handing control to Mulvaney as the acting director until the Senate confirms a permanent CFPB director. Nearly 30 Congressional Democrats recently vowed to continue fighting to displace Mulvaney and replace him with English. English herself is suing Trump to block Mulvaney leading the watchdog agency.

Adding a measure of intrigue, Deepak Gupta, the lead lawyer of a boutique law firm that launched its suit on behalf of CFPB acting director Leandra English, confirmed in a CNBC interview that English is not paying for his hourly fees, but rather unknown anonymous donors are.

But English is not alone. Citing “regulatory chaos” caused by the fight over who is the legal leader of the regulator, the Lower East Side People’s Federal Credit Union called on a federal court to remove Mulvaney and affirm Leandra English as the proper acting head of the bureau. This is a legal challenge against the administration by an entity regulated by the CFPB. The Credit Union charges that “President Trump has attempted an illegal hostile takeover of the CFPB,” claiming that the Vacancies Reform Act’s provision that the President “cannot appoint an acting director to an independent multi-member board or commission without Senate approval” was illegally ignored.

It will be interesting to see how this all plays out. Will the CFPB survive or be one of the shortest lived federal agencies?

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Jake McDonald, a member of the CBIZ Credit Risk group, keeps his finger on the pulse of the financial sector. He can be reached at (610) 862-2202 or jwmcdonald@cbiz.com

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