Thursday marks the official birth of the Consumer Financial Protection Bureau, which has been heralded by consumer advocates as an historic consumer watchdog that will protect consumers from deceptive lending practices.
The Consumer Financial Protection Bureau (CFPB) was created a year ago as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to address some of the systemic problems that were widely viewed as responsible for the credit crisis of 2008 and the global economic downturn that followed. Congress intended the CFPB to be a consumer watchdog agency that would ensure greater accountability of the financial markets and put an end to deceptive lending practices.
“A lot of the problems triggering the economic downturn of the last few years could have been avoided,” argues Jeff Madrick, a senior fellow at the Roosevelt Institute and author of Age of Greed—The Triumph of Finance and the Decline of America, 1970 to the Present. “Had something akin to the CFPB existed, it would have made the risks clear and stopped or even outlawed some of the deceptive loan practices triggering the 2008 subprime mortgage crisis.”
So what exactly does the new agency mean for consumers? Overall, writes Elizabeth Warren in a recent blog post, the function of the CFPB is not so much to create tighter regulations, but to create a more honest marketplace for financial products.
“A properly functioning market relies on consumers’ getting the information necessary to make the best decision for themselves and their families,” writes Warren. “Consumers have the power to drive markets, but only if they’re provided with the basic information that lets them choose products that meet their needs and reject those that do not.”
According to the CFPB website, one of the agency’s first actions will be to launch a Consumer Response Center to help resolve questions about consumer financial products. In practice, this means working to:
- Put curbs on aggressive mortgage lending practices. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires mortgage lenders to ensure that borrowers can afford to repay a mortgage before issuing it. The CFPB will work to ensure that lenders institute greater disclosures and introduce more rigorous practices to verify that borrowers have sufficient income and assets before issuing loans.
- Stop arbitrary interest increases on credit cards. Card issuers still raise credit card interest rates, even for consumers who pay their bills on time. Under the Credit CARD Act of 2009, card issuers can raise credit card rates at will, as long as they give cardholders 45 days notice of the increase. However, the law also requires issuers to review rate increases every six months and lower those rates if the increase isn’t justified by a deterioration of the cardholder’s creditworthiness. The new consumer bureau will work to enforce the finer points of the law and may even be responsible for updates to the rules going forward.
- Ensure the fairness of overdraft protection programs. The new agency will check that banks follow the new rules requiring consumers to opt in for overdraft protection programs for debit and credit card transactions.
Other tasks include overseeing payday lenders and other non-bank companies that provide financial services to consumers, ensuring fairness in credit score reporting and assisting military families to make sure service members and their families get the education programs and protections they are entitled to.
Advocates’ hopes for the new agency are high, but will it get off the ground or will it be dead on arrival as some Republican critics predict?
“I think it will succeed, because it is addressing some of the subtle and not so subtle abuses of the banking and credit card industry,” says Dr. Charles Geisst, author of “Collateral Damaged: The Marketing of Consumer Debt to America” and professor of finance at Manhattan College in New York. “Whatever its final form takes, it’s certainly an improvement over what we had before.”
Others are more skeptical. Author Jeff Madrick predicts that, at the very least, Republican critics of the new agency may succeed in making legislative changes that will severely curb the ability of the new agency to function.
Even before the Consumer Financial Protection Bureau opened, Republican lawmakers introduced legislation that would strongly curtail the agency’s powers.
Republican critics have also recently vowed to fight the confirmation of Richard Cordray, a former Ohio state attorney general, who was tapped by President Obama to head the agency. Elizabeth Warren, the architect of the new Consumer Financial Protection Bureau who led the agency through its set-up phase and was the favored candidate of consumer groups, faced even stronger opposition from Republicans and was passed over for the position.
“The Republicans will likely win some victories that weaken the bureau,” says Madrick. “Most important would be if they deprive the bureau of the automatic funding each year, as they are already doing for the SEC. Right now the bureau has automatic funding, but Republicans want to change that.”
Yet for critics of financial reform in general and Obama’s economic policies specifically, that would be just fine indeed.
“The CFPB is just another layer of government regulation added to an already over-regulated nation,” Club for Growth spokesman Barney Keller told the Daily Caller in an email. “Richard Cordray is just another foot-soldier in Obama’s war on economic freedom.”