Will Recent Efforts To Defang The CFPB Succeed?


The Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulatory body it gave birth to – the Consumer Financial Protection Bureau (CFPB) – are under fire. A recent House committee vote on a new bill and, separately, a three-judge panel ruling on a lawsuit both hint at future efforts to roll back regulations that were passed as a result of the 2008 financial crisis.

In September, the Financial Services Committee of the House of Representatives voted in favor of H.R.5983, The Financial CHOICE Act. The acronym stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs. Rep. Jeb Hensarling, R-Texas, who introduced the bill, said it will offer “economic growth for all, bank bailouts for none.” The 30-26 vote was mostly along party lines, as no Democrats voted for the bill and one Republican, Rep. Bruce Poliquin, of Maine, sided with Democrats and voted against the bill. With all eyes on the presidential election, the bill is not yet scheduled for a House vote.

Although the timing of the introduction of the bill and the court’s ruling are coincidental, both are indicative of a general pushback against what many see as far-too-onerous financial regulation.  The CHOICE Act would remove many of the capital and liquidity standards for banks; repeal several Dodd-Frank provisions, including the Volcker Rule, prohibiting banks from making certain kinds of high-risk trades; and exempt a wide variety of mortgages from the CFPB’s ability-to-repay/qualified mortgage rules.

The proposed bill would change the funding mechanism for the CFPB, which is currently funded by the Federal Reserve, and, instead, make it part of the appropriations process by Congress, and Congress would oversee the bureau. The CFPB would be renamed the “Consumer Financial Opportunity Commission” and would not have the authority to ban bank products that it deems “abusive.” (The bill’s language uses quotes around “abusive.”)

Interestingly, in October, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit issued a 2-1 ruling against the CFPB in PHH Corp. v. CFPB. In that case, Mount Laurel, N.J.-based mortgage company PHH was fighting against a June 2015 order by CFPB director Richard Cordray to pay $109 million in restitution for violating the Real Estate Settlement Procedures Act when it accepted kickbacks for loans in the form of mortgage reinsurance premiums that mortgage insurers paid to a subsidiary of PHH.

The CFPB order indicated that PHH could file an appeal in a U.S. District Court, so the company did. PHH claimed that the captive reinsurance arrangement was allowed because the amount paid by the mortgage insurer for reinsurance was not higher than reasonable market value and that the CFPB’s order was outside the three-year statute of limitations, as the premiums dated back to 2008. Importantly, PHH claimed that the CFPB was unconstitutionally structured because it has a single director that the president can remove only for cause, which is “inefficiency, neglect of duty or malfeasance in office.”

The panel ruled that the CFPB is, in fact, unconstitutionally structured, but it did not agree with PHH that the solution would be to shut it down, invalidate Dodd-Frank and pass new legislation to fix the constitutional flaw. Instead, the court said in its ruling that the solution is to sever the statute’s unconstitutional for-cause provision from the remainder of the statute, so the president now has “the power to remove the director at will and to supervise and direct the director.” Separately, the ruling also vacated the $109 million penalty.

In a recent statement, Rep. Hensarling said the CHOICE Act would solve some of the problems that PHH v. CFPB addressed. He called the CFPB “the most powerful and least accountable Washington bureaucracy in American history,” pointed to the CFPB’s “bizarre and defective structure,” and said President Barack Obama “illegally bypassed the Senate by appointing Richard Cordray to serve as the bureau’s director.” Hensarling also noted that his bill would solve the constitutional defect by replacing the current single director with “a bipartisan, five-member commission.”

Representatives of consumer advocacy groups point out that even with this new power to remove the CFPB director, President Obama has not done so. Besides, they say, the CFPB performs important work and does not need an overhaul.

“We worked very hard and long to pass Dodd-Frank and, as such, to create the Consumer Financial Protection Bureau,” says Hilary Shelton, director of the National Association for the Advancement of Colored People’s Washington bureau and senior vice president for policy and advocacy. “Any bill that weakens the intent of the CFPB undercuts the ability of the bureau to be able to provide this protection American people need.”

He notes that the recent events are among a series of attempts to make it much more difficult for the CFPB to provide consumer protections. “We call that the whack-a-mole effect,” he says, using the arcade game as a metaphor. “Predatory lenders will sometimes create one package or product we find to be discriminatory, and the moment we are able to find out it’s going on and amend it, another similar product pops up.”

Hensarling’s bill is not likely to pass, says Brian Simmonds Marshall, policy counsel for Americans for Financial Reform, in Washington, D.C. “I don’t see a possibility the White House would entertain this bill,” he says. “I don’t see any of these ideas becoming law during this Congress.”

Simmonds Marshall adds that not only would the bill undo the reforms that were enacted by Dodd-Frank, but it would also create an environment with even weaker regulations than before the financial crisis. “Also, it has a number of provisions intended to politicize the CFPB and the Federal Housing Finance Agency by turning them into commissions and ending their dedicated funding,” he says. “It would give Congress more day-to-day control over the mortgage market.”

As for the court decision, he notes that the CFPB hinted it would appeal. In a filing with the U.S. District Court for the District of North Dakota, the CFPB wrote, “The panel decision was wrongly decided and is not likely to withstand further review.” The next step would be for the CFPB to appeal the decision to the full district court.

“We agree with that assessment, and we think that that decision is very likely to be overturned,” Simmonds Marshall says.

Yana Miles, a policy counsel for the Center for Responsible Lending in Washington, D.C., says the nonprofit organization was disappointed with the PHH v. CFPB ruling but notes that the ruling has no impact on the CFPB. “In terms of rulemaking authority, it will continue to exist,” she says. “The court made this clear: The CFPB with a single director with funding structure will continue.”

As for the Hensarling bill, Miles agrees that the bill is simply a way to weaken the CFPB and will probably not succeed. “If there is one lesson from the 2008 financial crisis, it is consumers need an independent regulator to look after their interest,” she says. “Since its inception, the CFPB has won back billions of dollars in restitution for consumers, or actual penalties for abusive and discriminatory and deceptive behavior against college students, the elderly, veterans and people of color.”

She points out that not only did the vote stay along party lines, but there were also no amendments. “There was no discussion of compromise,” she says. “That is very telling, and it’s not a good way to start if you want something to hit the floor.”

Other organizations commented online. The American Bankers Association (ABA) sent a letter to the House Financial Services Committee indicating the ABA agrees with several provisions of The Financial CHOICE Act, such as changes to the qualified mortgage rules and the Volcker Rule and for banks with $10 billion to $50 billion in assets to be exempt from stress tests because they are costly and overly bureaucratic.

The Mortgage Bankers Association sent a letter indicating that it supports several ideas in the bill, such as making the CFPB a multimember commission under the oversight of Congress, but it does not support other parts of the bill, such as increasing the fines that a financial institution can be assessed.

The 500-page bill is here.

The CFPB’s filing after the PHH decision is here.

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