Commentary: How the CFPB Fight Is a Sign of the Next Financial Crisis
The Consumer Financial Protection Bureau (CFPB) was created after the 2007–08 financial crisis as an independent watchdog for the public. The crisis demonstrated that while abusing consumers might be profitable in the short term, it leads to greater long-term risks if left unaddressed.
By and large, the steps taken post-crisis are working. Credit card customers have seen costs go down—saving on average about $300 per year for those who carry a balance—while the volume of consumer credit is back to pre-crisis levels and regulations have clamped down on hidden fees. Banks are as profitable as ever, and the Dow is at record highs.
Yet the Trump administration and many congressional Republicans seem all too eager to return back to the days when government turned a blind eye to recklessness in the private sector, which could sow the seeds of the next financial crisis.
Perhaps nothing better demonstrates this shift than the dueling director battle at the CFPB. After Richard Cordray stepped down as director, his deputy, Leandra English, was to become the acting director as per the Dodd-Frank financial regulation law. Instead, President Donald Trump appointed his Office of Management and Budget (OMB) director, Mick Mulvaney, to fill that role. Since then, English and Mulvaney have been jockeying for control of the agency, with each claiming its leadership.
Having a White House official also serving as CFPB director—and also therefore as a board member of the Federal Deposit Insurance Corporation (FDIC) and Financial Stability Oversight Council—not only violates Dodd-Frank, but undermines financial regulator independence and weakens oversight. Mulvaney’s appointment, as noted by University of Michigan Law School professor Nina Mendelson, also denies the Senate its ability to review and confirm a permanent director.
This is not the first time an acting Trump official has stepped into regulatory shoes. Trump’s acting comptroller of the currency rescinded guidance that restricted banks from engaging in predatory, payday-like short-term loans—a product that Wells Fargo had been one of a handful of banks offering. He declared that discrimination and illegal practices do not necessarily count against banks under the Community Reinvestment Act. And he worked to block the CFPB’s effort to restore victims’ right to band together and take financial companies to court rather than being forced into arbitration.
There have been countless other examples of the Trump administration taking the side of financial recklessness, from delaying a rule requiring that financial advisers put their clients’ interests first to declaring that American International Group, or AIG—the poster child of the financial crisis and bailout—should no longer be subject to tough oversight by the Federal Reserve.
To be sure, no bill or regulation is perfect, and unanticipated concerns inevitably come up after the fact. But as the House and Senate move toward major regulatory rollbacks in Dodd-Frank, it’s important to remember that these rules need to be altered with a scalpel, not dynamite.
It’s not too late to turn this car around before it plunges off the cliff. Some of the more moderate recommendations from recent Treasury Department reports, such as streamlining reporting requirements and having tailored rules for community banks, could provide a basis for bipartisan measures to get the balance right on regulation. The Federal Reserve, one of the nation’s oldest independent bodies, has choices to make under new Chair Jerome Powell that could continue strong oversight. Congress can eschew massive deregulation and instead take steps to help consumers, including expanding their credit rights after this year’s Equifax breach. That all depends on leaders in Washington remembering history and refusing to act as accomplices in driving toward the next crisis.
Michael S. Barr is a professor of law and public policy at the University of Michigan’s Gerald R. Ford School of Public Policy and a senior fellow at the Center for American Progress. He served as assistant treasury secretary for financial institutions from 2009 to 2010. Joe Valenti is the director of consumer finance at the Center for American Progress.