Are We Better off Curbing the Role of the Consumer Financial Protection Bureau?

By Norbert Michel, Heritage Foundation financial regulations expert

YES: It Has Too Much Power—and Besides, It Isn’t Necessary.

Limited government and free enterprise—these two principles largely define America. And the Consumer Financial Protection Bureau runs counter to both.

The CFPB has independent litigation authority, a single director removable only for cause, a budget completely immune to the regular appropriations process, and a mandate to regulate financial markets under an ill-defined new concept of consumer protection. No federal agency should have such power.

Whatever oversight is in place is too ineffectual to prevent the CFPB from taking actions that harm the financial industry and consumers, and in no way certain to undo such harm.

The CFPB thus expands a disturbing trend—that of Congress creating regulatory agencies that are unaccountable to the public in any meaningful way, yet empowered to essentially create laws by way of regulatory dictate.

All such federal agencies should be eliminated.

Proponents of the CFPB argue that the bureau’s strength and independence is vital for consumer protection. But Congress long ago established a viable consumer-protection framework administered by more than one independent federal agency, and financial crimes against consumers were regularly prosecuted long before the CFPB was created. Congress transferred authority for approximately 50 existing rules and orders stemming from almost 20 federal consumer-protection statutes over to the new bureau. Whatever success the CFPB claims could have been achieved without its existence.

One valid critique of the consumer financial protection framework before Dodd-Frank is that the laws were spread among too many different agencies. But consolidation of consumer protection in one of the existing agencies, such as the Federal Trade Commission, wasn’t given serious consideration during the Dodd-Frank debates.

There is no reason that transferring responsibility for all consumer financial protection statutes to the FTC (or another of the existing agencies) wouldn’t have reaped at least the same efficiency gains as the Dodd-Frank approach. Indeed, moving this responsibility to the FTC, an agency with decades of consumer-protection experience, would have been a better option.

Of course, Dodd-Frank didn’t stop at merely transferring existing authority to the CFPB.

The pre-Dodd-Frank regime focused on protecting consumers against businesses that engaged in deceptive or unfair practices. Dodd-Frank went further, giving the CFPB the authority to develop a new, ill-defined, consumer-protection concept: abusive practices.

This term is based on the notion that companies prey on helpless consumers, tricking them into financial contracts that are all but guaranteed to default.

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 couldn’t repay their loans.

The CFPB approach effectively assumes that loan defaults are primarily caused by lenders, thus ignoring borrowers’ contractual obligations.

This mind-set is antithetical to freedom of contract, and it rejects the basic idea that certain debt contracts are beneficial for some people even though they might be inappropriate for others.

Free enterprise allows people to work these issues out for themselves, and it protects people from the elites who feel they know best. Curbing the CFPB’s authority is necessary to preserve Americans’ economic freedom.

The piece originally appeared in The Wall Street Journal 

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