This week, House Financial Services Chairman Jeb Hensarling (TX) tees up his so-called Financial Choice Act 2.0 (draft) with a Wednesday 26 April hearing. Some call it the Wall Street’s Choice Act or the Wrong Choice Act; I wonder if a better name would be the Cruel Choice Act, because it is cruel to consumers who have been protected in the financial marketplace by the CFPB, but who would be left with an industry-designed substitute agency even weaker than the Federal Trade Commission, which already fights with two hands tied behind its back. It's a brutal un-do of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that forgets, or ignores the historical fact that reckless bank practices abetted by loose regulators wrecked our economy in 2008. A key goal of the proposal is to weaken the successful CFPB into an unrecognizable husk incapable of protecting consumers.
While the entire bill purports to return “liberty” and “choice” to financial markets, it does this by taking aim at the 2010 Dodd-Frank Act's protections for consumers, depositors, taxpayers, small investors and the financial system itself from reckless actions by Wall Street banks, high-cost predatory lenders and debt collectors. In this column, I will focus on how the current draft of the bill is designed not to simply tie the CFPB’s hands, but cut off its arms and legs.
Let’s remember that in just under 6 years, the nascent CFPB has restored order to financial markets torn asunder by a decade of weak regulation that emboldened corporate wrongdoers into testing the outer limits of the question: “just how many unfair consumer practices can we get away with?”, then piled on toxic securities practices that ultimately destroyed investor confidence and resulted in the largest financial collapse since 1929. Let’s not forget that the 2010 Wall Street Reform and Consumer Protection Act was a measured response to that; let’s not forget that it has worked and worked well. Despite industry claims, the financial industry has returned to profitability but now with guardrails to protect innocent consumers from bankers recklessly driving.
By all accounts, the CFPB was a centerpiece of that act. It solved the problem that four bank regulators had previously competed in a race to the bottom, leaving consumers unprotected, no matter where they banked. It solved the problem that the FTC had few tools to defend consumers against unfair practices by non-banks (mortgage companies, payday lenders, private student lenders, debt collectors, etc.). It gave consumers protection across the entire financial marketplace and left wrongdoers no place to hide. The CFPB has been wildly successful, already returning $11.8 Billion dollars to 29 million harmed consumers.
Some Highlights of How the Financial Choice Act Eviscerates the CFPB: We’re still digging through last week’s draft of the Choice Act 2.0. Here are a few top-lines.
It Eliminates Independent Funding: Since 1864, (that is, over 150 years ago) it has been national policy that bank regulators have had funding independent of the appropriations process to insulate both financial regulation and the economy itself from manipulation by powerful special interests. The Financial Choice Act 2.0 places CFPB – and other bank regulator -- under the flawed, politicized appropriations process.
It Neuters Its Director: The Financial Choice Act 2.0’s latest iteration weakens the director, allowing the director to be fired at will (instead of, as now, only for cause, e.g. malfeasance) and, while it calls the proposed “Consumer Law Enforcement Agency” an independent agency, it moves it fully into the executive branch, which triggers additional duplicative constraints and political limitations on its ability to protect the public.
Eliminates CFPB’s UDAAP (Unfair, Deceptive or Abusive Acts and Practices) Authority: An important tool for regulators is the ability to challenge unfair and deceptive practices. The CFPB had been given a third prong, the ability to challenge “abusive” practices as well. Bank regulators can, but seem to only rarely, enforce the FTC’s primary enforcement tool, its Section 5 Unfair and Deceptive Acts and Practices (UDAP) authority. The FTC has no authority over financial institutions. Rather than narrowing CFPB UDAAP to UDAP authority, the Financial Choice Act 2.0 simply eliminates all CFPB authority over unfair, deceptive or abusive practices. Effectively, this means no agency overseeing non-bank financial players has the ability to write rules based on such practices, since the FTC has no rule-writing powers to speak of.
Eliminates Much Supervisory Authority: All bank regulators have supervisory, or examination authority. The CFPB supervisory authority gives it the right to “look under the hood” and stop problems before they start. CFPB’s supervisory authority over all banks greater than >$10 billion in assets is repealed and returned to the prudential bank regulators (FDIC, OCC and Fed), which famously ignored or encouraged dangerous practices that grew from the 1990s through 2008, when the financial system collapsed. A weaker version of supervision is retained for the CFPB over certain non-banks currently under supervision. We are still evaluating the impact of this section.
Makes Key Statutory Offices “Optional:” Congress established an Office of Older Americans, an Office of the Student Ombudsman, an Office of Service Member Affairs and an Office of Financial Empowerment as permanent offices inside the CFPB. The Financial Choice Act 2.0 makes these statutory office “optional,” so a future anti-consumer director could eliminate them, their duties or their staff.
Eliminates Public Consumer Complaint Database: The CFPB, as a “data-driven” agency, has published most of the over 1.1 million consumer complaints it has handled so far in a public database. The database is helpful to consumers choosing financial institutions, to academics and other researchers (including U.S. PIRG), and even to competitors. It is not unique: the National Highway Traffic Safety Administration publishes consumer complaints at safercar.gov; the Consumer Product Safety Commission publishes toy and appliance complaints at saferproducts.gov; other agencies also publish consumer complaints. The Financial Choice Act 2.0 simply eliminates the CFPB public database.
Market-Monitoring Function Eliminated While Requirements to Consider Costs and Access Increased: The Financial Choice Act 2.0 completely eliminates the Bureau’s monitoring of the safety of existing and emerging markets, including its duty to determine “risks and costs” to consumers of using certain consumer products. Yet at the same time, the bill imposed an odd new and contradictory “dual mandate” for the CFPB to not only enforce laws but to strengthen participation in markets by “covered persons, without Government interference or subsidies, to increase competition and enhance consumer choice.” Numerous new provisions also impose massive analysis-paralysis on the bureau; the new “Office of Economic Analysis” would require massive, resource-intensive assessment of the costs of all rulemakings and enforcement actions on both those covered firms and on consumer “choice. Measuring the benefits of rules? Not a priority.
Eliminates Authority to Regulate High-Cost Payday Lending or Arbitration: The CFPB was given explicit authority by Congress to ban or regulate arbitration in consumer contracts, if it found it harmful. It determined on its own – and partly due to Congressionally-granted supervisory authority -- that high-cost small dollar payday and auto title lending should be better regulated. Not to worry, predatory payday lenders and banks such as Wells Fargo hiding from its fake-accounts scandal behind arbitration clauses, the Financial Choice Act 2.0 explicitly eliminates CFPB authority over both small-dollar lending and arbitration.
This top-line review of the draft Financial Choice Act 2.0 does not cover all the diminutions of CFPB authority the bill proposes. We hope you get the idea that Chairman Hensarling’s choice is many bad choices, all horrific for consumers and the financial system: it’s the wrong choice, Wall Street’s choice and a cruel choice. Take your pick.
The idea of the CFPB needs no defense, only more defenders.