The CFPB Was A Mistake—Even Before It Abused Its Power

Last week I participated in the radio show On Point to discuss the legacy of the Consumer Financial Protection Bureau. It turned out to be something a debate with Richard Cordray, the first director of the CFPB.

I argued, as I have done for more than a decade, that creating a new government agency for consumer protection was never necessary. Cordray, of course, disagreed.

One of the funniest things was that Cordray, a career politician, acted baffled that the CFPB ended up being a “partisan political issue.” I’ve heard him make his case before, so I wasn’t shocked to hear Cordray blame this politicization on “the big financial companies.”

That’s pitiful enough, but Cordray’s reasoning for why it was necessary to create the CFPB in the first place is worthy of a comedy award. According to Cordray, we “need this agency” because “Congress passed a law and spent a year working on that law.”

So, if Congress eliminates the CFPB next year, that means we don’t need it. Case closed. I’m sure Cordray would immediately stop telling everyone that the CFPB is critical for protecting consumers.

My reasoning, though, is based on a practical view of the law and what various consumer advocates wanted before Congress created the CFPB in 2010.

Most Advocates Wanted Controls, Not the CFPB

For starters, Congress created the Bureau by giving it enforcement authority for about 50 different federal rules that stemmed from 22 consumer protection statutes. (Yes, I’m leaving aside all the state consumer protection laws.) Congress originally spread enforcement authority for these laws among the banking regulators (for banks), the Federal Trade Commission, and the Department of Justice.

It’s categorically undeniable that these federal laws, many of which were passed in the 1960s and 1970s, were being enforced.

A 1984 Federal Reserve report provides just one distant example. The document details the Fed’s efforts to improve the enforcement of various consumer protection laws and shows that the Fed received a total of 2,487 consumer complaints in 1983. These complaints—a pretty small number considering the size of the American economy—were related to at least 6 consumer protection laws. (By the year 2000, the number of complaints related to Fed member banks had fallen a bit.)

These laws were also undoubtedly enforced outside the banking industry. In 1999, for example, the FTC fined Franklin Acceptance Corp $800,000 to settle charges it violated the Equal Credit Opportunity Act.

Even Dissatisfied Advocates Didn’t Clamor for the CFPB

While these measures did not fully satisfy consumer financial protection advocates, those folks generally were not clamoring for a new government agency prior to 2010. Up to that time, various articles discussed ways to protect consumers against the supposed spread of “predatory lending.” But these articles typically argued that the solution was to restrict lenders from charging high points and fees, something that could have easily been done within the existing legal framework.

For just one example, take former Senator Paul Sarbanes’s (D-MD) Predatory Lending Consumer Protection Act of 2000. As this North Carolina University Law School paper explains, the Act’s “key regulation” for protecting consumers was placing a stricter limit on points and fees.

The legislative details are even more revealing.

The Act would have amended the Home Ownership and Equity Protection Act of 1994, a law that amended the Truth in Lending Act of 1968. Importantly, Sarbanes’s bill would have given enforcement authority to the Fed. It would not have created a new federal agency. Ironically, Sarbanes’s bill would have expanded the types of limitations and “protections” originally implemented by the 1994 HOEPA Act.

Many consumer advocates have been fighting for either de facto price controls or explicit price controls to “protect” consumers for decades. These groups have constantly pushed for expansions of consumer protection laws, and with each small victory, they’ve pushed harder. Still, there was no broad push for a new federal agency.

The Equal Credit Opportunity Act of 1974 provides one clear example of the advocates’ playbook. As with other consumer protection statutes, Congress gave enforcement authority for ECOA to the banking agencies, the FTC, and the DOJ. But as this 1984 Florida University Law Review article shows, consumer advocates took exception to the lack of discrimination suits that followed ECOA.

The CFPB Isn’t Necessary for Fighting Discrimination

Rather than consider that discrimination may not have been as rampant as was assumed, advocates pushed for reforms such as increased funding for enforcement, making it easier for plaintiffs to bring lawsuits under ECOA, and providing “a minimum recovery of $500” upon proof of an ECOA violation. The author even complained that creditors’ “increasing use of credit scoring systems” made it more difficult to prove “reckless disregard” of ECOA.

Just as the author argued in 1984, my point is that if these types of “protections” were necessary, they could have easily been implemented by simply tweaking existing laws. There was no need to create a new federal agency. That’s the same position most consumer advocates took prior to the 2008 financial crisis, and nothing that occurred during the crisis changed that logic.

Even the Qualified Mortgage Rule, implemented by Dodd-Frank and given to the CFPB for enforcement, essentially implemented HOEPA-like restrictions. There simply is no reason that one of the many existing federal agencies could not enforce those restrictions, or any other consumer protection provisions that Congress gave to the CFPB. And this argument has nothing to do with whether the CFPB, under any of its previous directors, exceeded its authority.

CFPB Unnecessary Even When Not Overreaching

For whatever reason, though, Cordray (and the host of On Point) suggested my arguments hinged on the CFPB “overreaching all the time.” But I made no such claim.

Still, since they brought it up: Yes, the CFPB has overreached.

One of the earliest examples was Cordray’s decision to change the long-held interpretation of the Real Estate Settlement Procedures Act of 1974. Cordray decided to retroactively apply a new interpretation and fine PHH Corporation $100 million for violating RESPA. Unsurprisingly, the D.C. Circuit Court of Appeals found that Cordray’s actions “violated bedrock principles of due process.”

There are many other examples of overreach at the Bureau, including (according to a federal judge in 2017) the CFPB’s “blatant disregard” of a court’s discovery orders. Also in 2017, a federal court dismissed a CFPB complaint for its “failure to meet minimum factual pleading standards, which deprived the company of fair notice of the grounds for the Bureau’s claims.”

There are many more examples but the main reason the CFPB should not have been created is that it was redundant. That’s separate from whether the Bureau exceeded its authority or whether it should have been set up under a different structure.

It is a legitimate function for the government to protect people from being deceived or defrauded. That’s what law enforcement should be doing. But Congress did not need to create a new federal agency for this purpose. Multiple government agencies, at both the federal and state levels, already did that.

The question that Congress should have debated before creating the CFPB is why the FTC, the federal agency whose motto is Protecting America’s Consumers, couldn’t protect America’s consumers. I doubt that this would have been any tougher than debating Cordray on whether Congress should have created the CFPB.