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House Committee Chairs Blast CFPB's "Virtually Limitless Power"
Shortly before recessing for the holidays the Chairmen ofrnthe House Committee on Oversight and Government Reform and of its Subcommittee on TARP, Financial Services and Bailouts ofrnPublic and Private Programs issued a report titled The Consumer Financial Protection Bureau’s Threat to Credit Access inrnthe United States. The creation ofrnCFPB was a central fixture of the Dodd Frank Wall Street Reform and ConsumerrnProtection Act and has been the target of both the banking and financerncommunities and Republican members of Congress rn</p
The report by Committee Chair Darrell Issa (R-CA) andrnSubcommittee Chair Patrick McHenry (R-NC) claims that the Dodd-Frank Act gavernthe Bureau “virtually limitless power” and “the real potentialrnto severely reduce credit access for American consumers.” </p
Unlike other independent financial regulators like thernFederal Reserve or the FDIC, they say, CFPB is run by a single director insteadrnof a bipartisan or nonpartisan commission (Ed. note: the FDIC is an independent agency run by arnchairman and Board of Directors) and is not subject to annual congressionalrnappropriations nor are its regulations reviewed by the office of Management andrnBudget. This allows the CFPB to be a rogue financialrnregulator with potential to</bcreate uncertainty for providers ofrnconsumer financialrnproducts and services.</p
It slams the appointment of its first director, RichardrnCordray as “controversial and legally questionable and says it generatesrnuncertainty for financial service providers and American consumers because arncourt could invalidate that appointment. rnCordray was given a recess appointment by the President after the Senaternrefused to allow the confirmation of anyone to the position. The two representatives find furtherrnunsettling that the Bureau has no “Plan B” for operating effectively shouldrna court find the appointment illegal. </p
They question the Bureaus “development as anrnindependent regulatory agency” and claim the Obama Administration isrnattempting to use it to further a partisan agenda, calling a visit by thernPresident to the Bureau a few days after Cordray’s appointment, a “victoryrnlap,” and citing meetings and emails between Bureau and Administrationrnstaffers as evidence the Administration is using the Bureau for partisanrnpurposes. </p
Issa and McHenryrnsay that their committees have closely monitoredrnthe CFPB since its creationrnand have become increasingly concernedrnthatrnits rulemakingsrnandrnenforcement actions couldrndiminish credit access for eligible consumers. This access has already declined for bothrnconsumers and small businesses they charge as banks have tightened lendingrnstandards in response “to burdensome Dodd-Frank regulations and anrnuncertain business environment.”</p
“Other than studentrnloans, which are almost completely now backedrnbyrnthe government,rnandrnauto loans, our credit markets remain constrained. Furthermore, as a result ofrnthe Credit Card AccountabilityrnResponsibility and Disclosure Actrnwhichrnthe CFPB is in charge ofrnimplementing, interest rate spreadsrnfor credit card loansrnhave increased, making itrnmore difficult for eligible borrowers to access therncapital they need for their businesses. Mortgage lenders are reportedly requiring the highestrncreditrnscores in arndecade to approve home mortgages, withrnan average credit score of 737rnforrnborrowers approvedrnforrna home loan in 2011.</p
Small banksrnand community lenders are especially overwhelmed by thernonslaught of “red tape”. Issa and McHenry blame the regulatory requirementsrnof Dodd-Frank Act for the closing or sale of many smallrnbanks. “More alarmingly, because only 33 percent of the 400rnrulemakings requiredrnbyrnthe Dodd-FrankrnAct have been implemented fully, the total extentrnof the Act’s effect on creditrncannot yet be accuratelyrnmeasured.” The reportrnquotes the Cato Institute that CFPB’s actions have already raised the cost ofrnconsumer credit by at least two full percentage points or $17 billion andrndepressed job creation by about 150,000 jobs.</p
The reportrnsays that the Bureau’srnmandate and structure have predisposedrnit to tighten restrictionsrnwithout considering the affect consumer lending. “Thisrncould decrease credit availability, make creditrnmore expensive,rnhurt small businesses, stunt job creation, and jeopardize a full economic recovery.”</p
The Bureau’s Dodd-Frank mandate empowersrnit to prevent “unfair, deceptive, or abusive” financial services orrnproducts. The chairmen devote a lot ofrnattention to what it calls the Bureaus refusal to define “abusive” inrnthis context, The terms “unfair” and “deceptive” have establishedrnmeanings in case law and regulation,rnthey say, but “abusive” has nornwell-established definition andrnthe CFPB has shown no willingness to define the term.</p
“This uncertainty creates a chillingrneffect on financial institutions thatrnarernreluctant to lend duernto the litigationrnrisk that could follow from the amorphous definition of “abusive.” Thernrefusal to define the term “abusive” “raisesrna lot of doubt and uncertaintiesrnin the minds of financialrninstitutions,” causing lendersrnto restrictrncertainrncredit products andrnservices. </p
According to thernchairmen, CFPBrnappearsrnpoised to enact burdensomernregulationsrnthat will restrict consumer creditrnaccess. Noted was a rule to regulaterninternational remittance transfers sent by individuals to consumers overseas. A Texas bank (which also sued over the abusiverndefinition issue) has stopped overseas remittances and has sued CFPB. The report estimates that 3,000 to 4,000rnother community banks and possibly that many credit unions will exit thernremittance transfer business over the rule.</p
Issa and McHenry say that recently proposedrnandrnforthcoming mortgage regulations</bhave received significant negativernfeedback especially a proposed rule to integrate mortgagerndisclosure forms requiredrnby two different regulatory acts. A credit union representative said that itrnwould be difficult to review the 1,100 pages of the proposal and thus somernsmaller credit unions may "simply throw uprntheir hands and quit making mortgage loans."</p
CFPB is currently considering another mortgage rule that would require arnlender to verify a borrower’srnability to repay a mortgage that does not satisfy therndefinition of a “qualifiedrnmortgage.” The report said this rule could increase the cost ofrnmortgage lending,rnreduce consumer choice, andrnmake it harder for consumers to compare mortgage options. </p
Another rule to supervise large debtrncollectors may make it more costly for lenders to collect debts owed byrnconsumers. Thus lenders will become morernhesitant to extend credit in the first place.</p
Finally, Issa and McHenry charge thatrnCFPB has a weak reliance on economics that prevents an evenhanded examinationrnof its regulatory actions. “Whereasrnother independent agencies likernthe SEC have an independentrndivision dedicated to methodical andrnunbiased economicrnanalyses,rnthernCFPB relies on a tiny office led by a part-time director with anrnapparentrnpredilection toward restrictive regulations” This makes it likely that CFPB wouldrnbe unaware of harm its actions might do to creditrnaccess among some segmentsrnof the population.”</p
The Bureau also doesrnnot perform adequate cost-benefitrnanalyses in its rulemakingsrnand has failed to adequately assess reduced credit accessrnasrna cost to its regulations. While other independent financial regulators have improvedrntheir cost-benefit analyses,rn”the CFPB has givenrnno indication that it wouldrnconsider enhancing its ownrncost-benefitrnprocedures.”</p
Similarly,rnthere is concernrnthat the Bureaurncould regulate informally – bypassing traditional notice-and-commentrnrequirements – by coercingrnfinancialrninstitutions to act “voluntarily.” Without therncertainty of thorough notice-and-comment rulemaking, lendersrnwill be less likely to extendrncredit. </p
The report concludes by saying the CFPB has beenrngiven carte blanche authority tornregulate the offering of consumer financial productsrnand services in the United States, “but it lacks the necessary institutional andrnexternalrncontrols typically found in anrnindependent agency. As arnresult, the CFPB is uniquely positionedrnto drastically – andrnperhaps unalterably – affectrnthe consumer creditrnmarket for Americanrnfamilies and smallrnbusinesses. With a growing dividernbetween American consumersrnandrnbusinesses withrnand without adequate accessrnto credit, the CFPB must bernmindful to ensure that the United States retains a vibrant,rnrobust, and fully accessible creditrnmarket.”</p
MND has askedrnCFPB for its response to the report but has not yet heard from the agency.
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About the Author
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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