Consumers Will Be Safe Without The CFPB

Financial regulators are rarely the subject of a media frenzy, but because the Trump administration has zeroed in on the Consumer Financial Protection Bureau, this past week has been the exception. Some of the hysteria is over Elon Musk, the billionaire Trump tapped to cut waste from the federal bureaucracy. But much of the ire is aimed at Russ Vought, the Office of Management and Budget director and the acting CFBP director.

Vought directed all CFPB employees “not to issue any proposed or formal rules, stop pending investigations and not open new investigations, halt all stakeholder engagements, and abstain from issuing public communications.” Vought also announced that the CFPB would not take its “next draw of unappropriated funding” from the Federal Reserve. To top it off, the CFPB also fired its probationary workers “as part of the Trump administration’s government-wide layoffs.”

Predictably, a federal employees union quickly sued to stop the Trump administration from “dismantling” the CFPB. But in a move that would be strange for anyone who wanted to shut down an agency, Trump also nominated Jonathan McKernan to be the next CFPB director.

Full disclosure: I do not think Congress should have created the CFPB, something I’ll explain in a bit. But first, let’s review what happened during the first Trump administration.

Possible Overreaction Based on Trump 1.0

In 2017, President Trump appointed Mick Mulvaney, then the OMB director, as acting director of the CFPB. Mulvaney then implemented a hiring freeze for the CFPB and stopped work on all new regulations and guidance. Soon after, Mulvaney informed the Fed that the CFPB would not take its next funding draw.

New York Times Magazine then ran a story claiming that Mulvaney had given a “master class” on how to destroy a bureaucracy from within, claiming that he “took it [the CFPB]

apart.” In the article, Lisa Donner, head of Americans for Financial Reform, argued that Mulvaney had dismantled the CFPB “piece by piece, brick by brick.”

Sound familiar?

Obviously, nobody took the CFPB apart. If they had, nobody would have the chance to do it now. So, it makes sense to reevaluate whether the Trump administration is dismantling the CFPB.

Consumer Protection Predates the CFPB

More importantly, it makes sense to reevaluate whether the CFPB is necessary to protect consumers. As I’ve argued before, that idea wasn’t true before Congress created the CFPB, and it’s still flat wrong.

For starters, Congress created the CFPB by transferring enforcement authority for more than 20 federal consumer protection laws to the new agency. One can disagree with how effective those laws were, but one cannot claim that there was no consumer protection. (And that’s only federal law, saying nothing of the fact that every state has its own consumer protection laws.)

It’s also possible that, prior to creating the CFPB, the consumer financial protection framework was spread among too many federal agencies. But that’s a sign that there are too many federal agencies, and Congress could have consolidated those laws with any of the existing agencies. The obvious choice would have been the Federal Trade Commission, the agency (created in 1914) whose motto is “Protecting America’s Consumers.”

But Congress never seriously debated this sort of reform or any other ways to fix possible weaknesses in existing consumer protection laws before creating the CFPB in 2010.

Instead, Congress created the CFPB and expanded the consumer protection framework beyond merely protecting consumers against deceptive or unfair practices. Deciding that those decades-old standards for consumer protection were insufficient, Congress chose to protect consumers against themselves—sort of. That is, Congress gave the CFPB the discretionary authority to develop a new, ill-defined consumer protection concept known as abusive practices.

Congress did not, however, define abusive practices.

Still, the term is based on the notion that companies prey on helpless consumers who can’t really know what they’re signing up for. According to this theory, companies actively trick people into financial contracts that are all but guaranteed to default.

Ignoring that existing regulation might add to some consumers’ confusion, the idea that financial markets generally work in this manner defies logic. Legitimate lenders wouldn’t stay in business if they actively sought clients who were unable to repay their loans. Ultimately, the theory behind this new concept assumes that financial firms regularly exploit their customers, and the federal government needs to step in to set terms and prices, not merely to protect against fraud.

Put differently, this consumer protection concept assumes that the government must direct the market because markets do not work. This idea has little to do with regulation but everything to do with giving federal officials the authority to dictate who can sell which products to whom and on what terms and prices. It gives the government the authority to usurp the market. And that’s one of the reasons that the CFPB has been so controversial from the beginning.

Fines Do Not Prove the CFPB is Necessary

It is also true that the CFPB has levied billions in fines against financial institutions. But that’s not really evidence that the CFPB is necessary. Aside from the fact that any other government agency could have levied the same fines, the gross amount also reflects that Congress has made consumer protection law overly vague, and the cost of fighting the government in court is very high.

Focusing on the total collected also ignores the fact that the agency is redundant.

In fact, state officials are frequently the first to prosecute fraud, only to have federal officials pile on after the fact. In 2019, for instance, the CFPB announced a major settlement with Equifax regarding a data breach, one that included total penalties of up to $700 million. But the fine print shows that the CFPB worked with the FTC and state attorney general offices in 48 states, plus Washington, D.C. and Puerto Rico. The same scenario has played out multiple times in the past.

The idea that the same level of consumer protection could not be achieved without the CFPB does not stand up to scrutiny.

Focusing just on financial markets, the United States has twelve separate federal financial regulators and state regulators for securities, banking, and insurance companies. (See page 134 of this document.) Americans are right to clamor for streamlining the government.

Congress created the CFPB without a thorough understanding of the housing market collapse, the subsequent failure of major financial firms, or the resulting shock to the economy. They did it without debating the meaning of consumer protection, much less whether the existing consumer protection laws and agencies were flawed. Congress can fix that mistake by eliminating the CFPB and either restoring the pre-Dodd-Frank enforcement authority or consolidating those laws at the FTC.