Despite consumer support of the Consumer Financial Protection Bureau (CFPB), recent leadership shifts and policy changes have sought to undermine the bureau, which could be risky for consumers in the current economic landscape.
Given a rapidly accelerating economy, the Federal Reserve’s current approach to monetary policy, and recent policy shifts to grow the economy, as well as boost big banks and corporations — like the Tax Cuts and Jobs Act (TCJA) and rollback of the Dodd-Frank Wall Street Reform and Consumer Protection Act — a weak CFPB would be unable to check big business and Wall Street from adopting corrupt practices and precipitating another recession.
According to a recent poll released by the left-leaning Americans for Financial Reform (AFR) and the Center for Responsible Lending (CRL), 80 percent of American voters are “concerned about CFPB’s efforts to curb enforcement of fair lending rules, ending enforcement of payday lending rules and restricting public access its database of complaints.”
The poll also found that more than 90 percent of voters believe it is “important to regulate financial services and products” and “58 percent agree with the statement that payday lenders are predatory because of their high interest rate, debt trap model.”
Furthermore, 79 percent of voters support the rule to hold payday lenders accountable, and 73 percent support the Dodd-Frank Act.
Under the leadership of interim director Mick Mulvaney, the CFPB has taken a more lax approach to its duties as the financial watchdog for American consumers, like backtracking on its payday lending rule by calling it “arbitrary and capricious.”
The rule, announced in October by the CFPB, requires lenders to “choose between two ability-to-repay underwriting methodologies and requires lenders to report and obtain information about a consumer’s financial obligations and borrowing history from certain consumer reporting agencies that are required to register with the Bureau. For all covered loans, the Rule limits certain repeated payment withdrawal attempts from a consumer’s transaction account and requires lenders to provide disclosures related to certain withdrawal attempts.”
This rule intends to stop lenders — dubbed “payday lenders” — from issuing high-interest personal loans to consumers strapped for cash based on their income and credit profile, then automatically withdraw payments from the consumer’s monthly or biweekly paychecks.
Payday lenders are often considered predatory for making it difficult for consumers to pay back the loans, and are often accused of charging hefty hidden fees.
Mulvaney has halted probes into payday lenders, and called the bureau “one of the most offensive concepts, I think, in a representative government,” referring to the fact that it is an independent institution with regulatory power not accountable to the president.
But not everyone thinks the CFPB should be shutting down payday lenders: Bob DeYoung, a capital federal distinguished professor in financial markets and institutions at the University of Kansas, told Freakonomics that there isn’t enough inquiry into the practices of the payday lending industry for agencies like the CFPB to be hunting them.
For some consumers, he said, payday loans can help pull them out of a rough financial situation, but not all consumers use them responsibly, which isn’t the fault of the payday lenders. DeYoung said he isn’t an advocate for the industry, but does believe more research should be conducted before regulations like the payday lending rule are implemented.
But with leadership of the CFPB soon shifting, it’s unclear how payday lending will be addressed in the future.
The Trump administration’s nomination for permanent director of the CFPB, Kathy Kraninger, has no experience in the finance industry or in leading an agency, but brings extensive experience from the Department of Transportation (DOT) and Department of Homeland Security (DHS) in high-profile, management roles.
Her nomination has drawn opposition from lawmakers who support the Dodd-Frank Act, like Sen. Elizabeth Warren (D-MA), who say she does not have the experience necessary for the role.
But according to a New York Times profile of Kraninger, her supporters say she will bring excellent people skills and effective management techniques to the bureau, and is well-equipped to handle the CFPB despite her lack of direct experience.
CBS News reported that Kraninger “sidestepped” questions about the payday lending rule (often considered a crucial, though controversial, part of the mission of the CFPB), refraining from expressing support for it or detailing how she would run the CFPB if she wins the nomination.
In June, a New York federal judge ruled that the CFPB’s setup is unconstitutional because it is not accountable to the president or Congress. The Washington Post’s report noted that as a result of this ruling, the future of the CFPB may be decided in the United States Supreme Court.
(In that particular New York case, the CFPB had accused and sued a company for scamming retired National Football League (NFL) players out of settlement money for injuries.)
According to the Washington Post, the original House bill rolling back the Dodd-Frank Act included preventing the CFPB from writing rules to regulate consumer financial companies without congressional approval.
While this provision was not included in the final bill, it does reveal a negative attitude among many regulators toward the CFPB, despite the CFPB’s recent and lauded crackdown on Wells Fargo’s corrupt practices hurting consumers.
Meanwhile, the Fed is cautiously reining in a booming economy to avoid overheating and a potential recession as Wall Street and corporations take advantage of laxer rules and regulations to rapidly invest.
As Bankrate’s Chief Financial Analyst Greg McBride told InsideSources, “The economy is firing on all cylinders right now, (but) that does not make it immune to economic cycles.”
At the Federal Open Market Committee (FOMC) meeting July 31-August 1, the Fed voted to maintain interest rates at just below 2 percent. The Fed also said current economic risks — like tariff and trade disputes — “appear roughly balanced,” which means the Fed doesn’t see any serious threats posed to what it calls a “strongly” growing economy.
“The labor market has continued to strengthen and that economic activity has been rising at a strong rate,” the press release reads. “Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly.”
McBride advised consumers in an article for Bankrate that “all signs still point to a September rate hike. Continue paying down variable rate debt such as credit cards and home equity lines, and refinance adjustable rate debt into fixed rate to insulate yourself from further rate hikes. Because there will be more.”
Despite the Fed’s positive review of the booming economy, it is holding to its announcement from the beginning of the year that it will approach the economy and interest rates with caution so as to preempt an economic downturn.
As fears of a recession lurk, a weaker CFPB could fail to catch bad actors in business before they trigger such a downturn, which was the mission of the CFPB expressed in the original Dodd-Frank Act, as consumers were the biggest losers of the 2008 recession.
The Senate will vote on the nomination for the new CFPB head tomorrow. The new head may have more reasons than ever to watch Wall Street closely, but may be unable to given the regulatory landscape.