When the Obama government ascertained the complex causes that led to the “Great Recession” of 2007-2009, it enacted into law rules that would prevent the excessive risk-taking that created that financial crisis. The full title of the law, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), states its two-fold intent:
- to restructure the rules governing financial companies so that investors have more secure markets in which to invest, and
- to protect consumers from losing their investments to securities that carry an unnecessarily high-risk of loss.
One of the biggest impacts of the law was to establish a watchdog agency that had the authority to monitor and constrain financial services providers if and when they imposed onerous burdens on taxpayers. The agency created to provide that oversight, the Consumer Financial Protection Bureau (CFPB), was established in July 2011. Until the passage of the DFA, the government had no civil authority to intervene in the activities of investment companies that took enormous risks with their client’s invested funds.
Financial Market Oversight
The housing market bubble that burst in 2007 revealed years of shady dealings by the financial services industry. Poorly secured mortgages, bundled into “retirement investment assets” by banks and other lenders, were sold to investor groups. When those mortgages failed, the investor groups lost the value of those investments, as did millions of their retiree clients.
At the same time, digital technology was driving the advent of different forms of financial services companies. Payday loans, auto title loans and other short-term, high-interest loan opportunities were providing millions of consumers with much-needed, short-term cash support. Many of these borrowers presented challenges to the traditional lending community: Either they had poor credit ratings and couldn’t qualify for a traditional, bank-issued loan, or the dollar values they requested were below the bank’s threshold for a profitable transaction. Because these new lenders are not “banks” — they don’t hold investor or member accounts — they are not subject to traditional banking laws. The establishment of the CFPB gave the government a mechanism to oversee the activities of both traditional and non-traditional lenders, to prevent a repetition of the circumstances that created the Recession.
The Dodd-Frank Act in Action
In its five years, the CFPB has taken great strides to create and implement regulations to “protect consumers from unfair, deceptive or abusive acts and practices.” As a monitor of federal consumer compliance laws, the Bureau has identified violations of and enforced those laws, working to apply consistency in its actions to promote fair competition. The agency also provides consumer finance information and education and has issued numerous rules to ensure that financial services and products are offered with transparency and efficiency to promote the country’s economic growth.
Dodd-Frank Reform Proposed
In June, the House Financial Services Committee released a proposed bill to dismantle the DFA and reform the CFPB. Titled the Financial CHOICE Act and introduced by Republican Congressman Jeb Hensarling, the bill aims to replace the DFA and restructure the CFPB. In his statement at the release of the Bill, Hensarling asserted his opinion that the DFA was “a grave mistake” that “has failed.” The proposed Financial “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs” (CHOICE) Act is intended to empower Americans to achieve greater financial growth “with real reforms that work.” Most significantly, the Bill changes many of the provisions that now enable the CFPB:
- The new organization would get a new name, the Consumer Financial Opportunity Commission, or the CFOC.
- The fundamental mission of the Bureau would change, with the addition of facilitating competitive markets along with assuring consumer protections.
- The Office of Economic Analysis would perform a cost-benefit analysis of proposed agency rules before their adoption and implementation.
- The new organization would need permission to access to personally identifiable consumer information.
- The makeup of the governance of the body would change. Instead of a single director, as is now the case, a non-partisan, five-member commission would lead the newly reformed agency. That board would gain a new leader with the establishment of a Senate-confirmed Inspector General for the specific purpose of overseeing the new organization. At present, the CFPB and the Federal Reserve are subject to a single Inspector General.
- Perhaps most significantly, the Bill proposes to abolish the current Bureau’s authority to prohibit “abusive” consumer financial products or services, as well as certain aspects of arbitration agreements. In May, the CFPB introduced proposed rules to prohibit class action waivers in consumer arbitration agreements. According to their reasoning, arbitration agreements that prohibit consumers from joining class actions suits regarding failed financial services fail to provide consumers with adequate means to gain relief from a company’s potentially harmful behaviors.
- The bill would also repeal the CFPB’s 2013 Guidance on Indirect Auto Lending ECOA Compliance. That year, the Bureau targeted “dealer markups” in auto loans. That practice involves auto dealers marking up their interest rates higher than that charged by the indirect auto lender (a bank or credit union that subsequently purchases the installment loan after the initial sale). The dealer then gains additional revenue from the sales contract after selling the loan to the indirect lender.
The portions of the Bill that directly relate to the CFPB are at pages 78 to 126 of a discussion draft, in the section titled “Empowering Americans to Achieve Financial Independence.”