How the CFPB Became a Law Unto Itself

Quote of the Day:

Congress should consider renaming agencies to reflect their true purpose, which is rule-writing and restrictive regulations (in most cases with good intent). No one is against consumer protection or environmental protection, but calling it the Consumer Finance Regulation Bureau, instead of “Protection Bureau,” would provide truth in advertising.

–Dennis Shaul in "What Went Wrong with the CFPB?" in the Wall Street Journal

It was virtually impossible to fire Richard Cordray from his position as director of the Consumer Financial Protection Bureau. But he has resigned and now a good piece in this morning's Wall Street Journal uses Cordray's departure to address the real issue: the CFPB is an agency created without any oversight whatsoever. It is a law unto itself.

Dennis Shaul, now CEO of Community Financial Services of America, was an aide to former Democratic congressman Barney Frank, chairman of the House Financial Services Committee,  when Dodd Frank was passed and the CFPB was created. 

Shaul is likely more sympathetic to more stringent regulations than most readers of this blog, but he is willing to concede that the CFPB turned out to be " a politically biased regulatory dictator and a political steppingstone for its sole director, who is now expected to run for governor of Ohio."    

An independent federal agency should be nonpartisan, Shaul notes, and admits that the CFPB, where not a single employee donated to Donald Trump's campaign, is not. The person President Trump appoints as director will have a partisan staff.

But Shaul points out that the vast power of the director is itself a problem. We've blogged on how the CFPB botched the Wells Fargo investigation, and Shaul states that situation succinctly:

The bureau took full credit for punishing Wells Fargo for opening false customer accounts. But the Los Angeles Times, not the CFPB, uncovered the malfeasance. More important, the CFPB fined Wells Fargo only $100 million, based on an incomplete investigation that found 2.1 million customers were affected. The actual number turned out to be 3.5 million. Meanwhile, large banks, including Wells Fargo, were fined tens of billions of dollars for toxic mortgages in the financial crisis. A threshold question is whether one person, in this case the director, should have the power to levy such fines.

The CFPB used fancy foot work to interject itself in the auto loan business:

Even though the Dodd-Frank Act expressly prohibits the CFPB from regulating automotive finance, the agency jumped into the field, alleging discrimination in auto lending. Because federal law prohibits auto lenders from gathering information on race, the agency had to guess at its claim of discrimination based solely on names and ZIP Codes, which the agency itself admitted as flawed and which one observer described as the equivalent of a student guessing on every answer on his SATs. The agency then went ahead with guidance that raised the costs of an average auto loan by an estimated $600.

The CFPB collected vast sums of money it could freely distribute to its ideological favorites:

The CFPB, like other agencies, collects fines and fees. Astonishingly, Congress does not require them to be transferred to the federal Treasury. Mr. Cordray has boasted of collecting billions of dollars on behalf of consumers, but portions of that money ultimately go to favored consumer groups—a continuing problem of ideological preference.

The agency's arbitrariness knew no bounds. It ignored more than a million comments from the public in making new rule on short-term, low-dollar lending. Some people rely on this kind of lending once in their lifetimes in a pinch. That did not matter to Mr. Cordray who dismissed their concerns.

Much of the regulatory work the agency did Mr. Cordray is likely to highlight in his quest for the Ohio governorship. It was widely known that he was considering this run while at the bureau, which would have created a conflict of interest.

The underlying problem is that Congress created what is in reality a regulation writing agency that had no checks on its power and posed as a protector of the consumer rather than a writer of new regulations that appeal not to the consumer but to a certain bureaucratic mindset.