No matter how the legal struggle over control of the Consumer Financial Protection Bureau (CFPB) is decided, the next director should start with a balanced view of the agency—what it has achieved since it was created, and where it must improve.
The CFPB has been far from the disaster some have painted and has registered real accomplishments for consumers, but the agency also has its flaws.
First, let’s not lose sight of why the CFPB was created in the first place.
The 2007-2008 financial crisis was a disaster for consumers, many of whom were left “under water” on mortgages that were often poorly underwritten. The housing bubble was driven by several factors, including misaligned incentives between lenders and borrowers, mispriced risk, a lack of transparency into certain financial products such as collateralized securities, and high leverage at some key financial firms. Regulators failed to see the extent of risk building within the financial system, as did many other market participants.
After the crisis, many believed that consumer protection had never been a priority for financial regulatory agencies that were focused on the safety and soundness of the financial firms they supervised. There was support from presidential administrations of both parties to create an independent agency focused solely on consumer protection. In 2008, the Treasury Department under President George W. Bush released a report calling for the creation of an independent Conduct of Business Regulatory Agency. The next year, President Obama’s Treasury Department issued a report that recommended creating a Consumer Financial Protection Agency, a proposal that was incorporated into the Dodd-Frank Act.
Although the CFPB has been perhaps the most polarizing aspect of post-crisis financial reform and has many critics, the agency has made consumers safer overall. The Bipartisan Policy Center’s report on the CFPB’s progress found its major rules on qualified mortgages, remittance transfers, and ability-to-pay, each benefited consumers while addressing the concerns of other market participants. And the agency has focused attention on consumer financial protection that was fragmented and uneven before the crisis.
Although the CFPB has been perhaps the most polarizing aspect of post-crisis financial reform and has many critics, the agency has made consumers safer overall.
That does not mean the CFPB has been an unqualified success. For example, while it has often been successful using its formal rulemaking process, the CFPB has too often resorted to using enforcement actions based on informal guidance. BPC’s report found that:
“[W]hen the Bureau operated in a transparent, open, and iterative manner, repeatedly seeking input from all stakeholders through a process, the results were generally positive. However, when the Bureau made unilateral decisions, rolled out initiatives, rules, or processes as a result of a more closed, internal deliberation process, the results were far more likely to be problematic.”
In addition, BPC made recommendations to address a series of other problems. These recommendations included better defining how the CFPB’s Civil Penalty Fund can be used, being more transparent about how the CFPB displays consumer complaints, working better with other financial regulatory agencies, and developing performance metrics to make it more accountable. BPC also called for the CFPB to study the impact of its decisions on access to credit, and for Congress to assign the agency its own inspector general instead of sharing one with the Federal Reserve as it does now. On these and other issues, the CFPB still has plenty of room for improvement.
Congress was right to create the CFPB. The agency has had some notable successes as well as some persistent flaws. The new director should take a nuanced view and focus on building on the agency’s successes while addressing the problems that remain.