President Trump’s first federal budget proposal got a lot of grief over the past week from both Republicans – some of whom say it’s “dead on arrival” – and Democrats – some of whom claim it’s actually going to kill people. But one small part of the plan got relatively little notice, maybe because it was on the next-to-last page of the document. That was the huge cuts proposed for the Consumer Financial Protection Bureau (CFPB), essentially abolishing it in a few years.
The Trump proposal would cut the agency’s budget by $145 million in 2018, a one-year reduction of more than 20%, with the cuts increasing to more than $700 million by 2021, when it would essentially be defunded.
I think that would be a terrible mistake. For those of you who disagree, I have two words for you: Wells Fargo (WFC).
The brainchild of Sen. Elizabeth Warren, the agency was part of the larger Dodd-Frank financial reform law that was enacted to make sure the global financial crisis doesn’t happen again. And since the American residential mortgage business was the principal cause of that crisis, it made sense to create a strong, if not aggressive, regulatory body over that business, as well as other consumer loan products like credit cards and auto loans.
It’s hard to believe, but before the CFPB’s creation, there was almost no federal watchdog looking to make sure that consumers weren’t being ripped off by banks and other lenders. Previously, the government agency responsible for protecting consumers from lender chicanery was the Federal Reserve, which was also the same body that regulated the largest banks in the country – not exactly the fox watching the hen house, maybe, but pretty close. If nothing else, the Fed was hardly the most suitable agency to be protecting consumers.
Compare that with Canada, where the independent Financial Consumer Agency of Canada (FCAC) is charged with protecting and informing consumers. It’s separate from the Bank of Canada, which governs monetary policy, and the Office of the Superintendent of Financial Institutions (OSFI), which regulates banks and insurance companies.
The Fed is still responsible for funding the Consumer Financial Protection Bureau (CFPB) under Dodd-Frank, although the Trump administration now wants to put it under the congressional budgetary process, which is certainly where it should be. However, gutting the agency is going way too far.
Needless to say, lenders have never been big fans of the CFPB. Previously, the mortgage industry was to a large degree under-regulated, which played a big role in creating the crisis, so it’s hardly surprising that it’s unhappy about what it feels is over-regulation. Since its creation, the agency has laid out hundreds if not thousands of pages of regulations that lenders and loan servicers must follow to ensure that they’re not harming or trying to fool consumers by failing to disclose vital information to them.
Many lenders balked at implementing those regulations, but the smart ones quickly adopted them, rather than complain about them, and found out that they actually improved their performance, not to mention their customer satisfaction levels. In most cases, the CFPB merely mandated and demanded practices originators and servicers should have been doing on their own all along without having been ordered to do them.
Is the CFPB in need of reform? Absolutely. Under the current structure, the agency’s director has a nearly imperial standing, free from worry about being removed by the President except for cause. (Advocates of that say it isolates him from political pressure.) And the current (and only) occupant of that office, Richard Cordray, has certainly behaved like an emperor. Indeed, the agency has largely ruled by fear and extortion, penalizing lenders for sometimes rather specious technical violations of the law and rules that harm no one, fining them based not on the level of actual wrongdoing but on their asset size and presumed ability and willingness to pay to avoid going to court.
In the Wells case, where the bank was fined $185 million, the CFPB was criticized by one Republican member of Congress for being “asleep at the wheel” for years while the bank was creating millions of phony accounts. That may or may not be true. Some of that may be attributable to the CFPB’s relative newness. The fact is, though, Wells demonstrated pretty persuasively that we need a federal cop on the beat to ensure that lenders do the right thing, and the CFPB has certainly helped fill that role.
Sen. Warren wins no plaudits here for her sanctimonious grandstanding in the political arena, where she’s one of the worst practitioners of the craft (if we can so call it). But she’s right that banks need to be watched to make sure they don’t mistreat their customers, which unfortunately happens way too often. Until their collective behavior changes for the better, we need agencies like the CFPB.
Consumer protection, especially one covering something as sensitive as people’s money, shouldn’t be a partisan issue. So, Mr. President, by all means reforms the CFPB, but don’t bankrupt it.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.