Five Questions about the CFPB Debate

Brian Knight, Senior Research Fellow at George Mason University’s Mercatus Center, explains the debate around the Consumer Financial Protection Bureau and the likelihood of its reform.

A flash point in the US FinReg debate is the CFPB. What is the CFBP?

The Consumer Financial Protection Bureau (CFPB) is the federal regulator charged with regulation and enforcement of consumer financial products and services pursuant to federal consumer protection laws. The idea of then professor and now Senator Elizabeth Warren, sought to address what was seen as a weakness in federal regulation–that the consumer protection function was spread out among many different regulators and had a conflicted incentive structure (e.g., some practices that are good for a bank’s profitability, and therefore good for its soundness, may arguably be bad for the bank’s customer).

The CFPB is, by design, an agency uniquely insulated from traditional means of democratic accountability. There is only one director who serves a five-year term and he is, for now at least, only removable by the president for cause. This is in contrast to other agencies, which generally either have a sole director that the president can remove at will or a multi-member commission that can only be removed for cause. The CFPB’s budget is not subject to the appropriations process and it does not rely on fees charged to regulated entities. Instead, the CFPB draws its budget directly from the Federal Reserve. This lack of accountability is one of the most controversial aspects of the CFPB.

What are the arguments for the CFPB?

The idea of a consolidated consumer protection regulator in and of itself isn’t that controversial. However, the current CFPB is. The CFPB’s proponents argue that the unique leadership structure and insulation from political pressures allow it to be an energetic advocate for consumers. Fans of the current CFPB argue that it is able to be more efficient in adopting regulations, less conflicted in its enforcement decisions, and act without the compromises that occur with multi-member commissions. Supporters worry that changes to the CFPB, such as making it a commission or subjecting its budget to congressional appropriations would “gut “its ability to hold financial service providers accountable.

What are the arguments against the current CFPB?

Critics of the CFPB generally argue that what makes the CFPB unique also makes it unaccountable and enable its excesses. These include the Bureau’s reliance on regulation-by-enforcement, which include excessively aggressive enforcement practices, such as changing the meaning of a regulation and applying it retroactively (as seen in the PHH case). It also includes the Bureau very aggressively trying to expand its authority into areas (such as auto lending and usury limits) that Congress explicitly excluded the CFPB from regulation. Where CFPB supporters see efforts by Congress or the executive to impact Bureau actions as a threat, CFPB opponents see these as democracy.  CFPB opponents feel that more accountability, both in the leadership of the agency and its funding, would help avoid these excesses with little to no impact on the CFPB’s ability to conduct its legitimate business.

What are the proposed changes to the CFPB?

There are several proposed changes to the CFPB, including the proposal to get rid of it entirely. There is discussion of defunding the CFPB and transferring its authorities to the Federal Trade Commission (FTC). The work of the CFPB would continue, but in a different agency with a different structure and funding model.

There are also small-c conservative changes proposed that would  simply roll back the unprecedented aspects of the CFPB to make it more like other agencies. Examples include making the director removable at will, installing an independent commission, making the CFPB’s budget subject to appropriations, and rolling back the CFPB’s unique power to prohibit “abusive” acts or practices. With the exception of the long-shot effort to undo the CFPB entirely, the proposed changes would retain  these changes accept a CFPB-like agency with CFPB-like powers, but with a different structure and funding mechanism.

Do you think that we will see substantive reform to the CFPB? If so what will that look like?

I see two possible scenarios. The first scenario has the CFPB is turned into a commission with its funding source changed to make it more accountable. The CFPB retains its authorities (with “abusive” authority either more narrowly cabined or removed) and uses rulemaking to provide concrete guidance on what those powers entail.

The second scenario is one where congressional Republicans feel their only tool is budget reconciliation, so they place the CFPB on budget and defund it, leaving the FTC to pick up the slack. This wouldn’t necessarily be bad from a consumer protection perspective, especially if the FTC is given and deploys the resources to oversee the consumer financial sector. The real problem is that such a move may exacerbate the political polarization the US is facing, and could set a precedent for the future.

I want to think the first scenario will play out, but I worry the second one is more likely.

What is the best book that you’ve read recently?

I’m going to play the “father of small children” card here and recommend Goodnight, Goodnight, Construction Site by Sherri Duskey Rinker. It is a fun story, has a good rhyme scheme, and keeps my twin boys quiet and happy for fifteen minutes, which is worth its weight in gold.

About Brian Knight

Brian Knight is a Senior Research Fellow for the Financial Markets Working Group at the Mercatus Center at George Mason University.

Brian most recently worked for the Milken Institute, where he headed up the FinTech and Capital Access programs. He has experience working for a broker-dealer with a focus on the emerging online private-placement market and was the co-founder of CrowdCheck, a company providing due-diligence and disclosure services to companies and intermediaries engaged in online private offerings. Brian has also served as an attorney for the federal government. Brian is interested in the interplay between technological, regulatory, and market innovation and how best to improve access to capital for businesses of all sizes.

Brian received his law degree from the University of Virginia and his bachelor’s degree from the College of William and Mary.

The views expressed in this material are those of the author as of March 8, 2017 and may or may not be consistent with the views of Brown Brothers Harriman & Co. and its subsidiaries and affiliates (“BBH”), and are intended for informational purposes only.

Neither Brown Brothers Harriman nor its affiliates or its financial professionals render tax or legal advice. Please consult with attorney, accountant, and/or tax advisor for advice concerning you particular circumstances.

BBH is not affiliated with Mr. Knight, the Mercatus Center,  or George Mason University.