Understanding the Consumer Financial Protection Bureau

What Is the CFPB?

The CFPB was created with a mandate to supervise consumer financial services companies, as well as large depository institutions and their affiliates. Two notable characteristics of the CFPB make it very different from other regulatory functions.

• The CFPB is a bureau, not a commission. For a bureau, there is a single director that is appointed by the president, subject to Senate confirmation. Richard Cordray is the only director the bureau has had, and he continues in this role today. A commission, conversely, is usually composed of several individuals that are selected from both of the main political parties, Republican and Democrat. The theory is this provides checks and balances to ensure no single party holds unfettered authority. For example, the Securities and Exchange Commission (SEC) is a commission that is composed of five individuals from competing political parties, which are also nominated by the president and confirmed by the Senate.
• The CFPB budget is embedded in the Federal Reserve budget. When the Dodd-Frank Act was created, the CFPB's budget was tethered to the Federal Reserve, being a percentage of the same. This is consequential as it immunizes the CFPB from congressional oversight; Congress cannot freeze, stall, or change appropriations funding. In 2014, there was a government shutdown, during which Congress failed to allocate funds to certain aspects of government. The CFPB was not one of them due to the fact that it was immunized from congressional oversight.

What Is the CFPB's Authority?

The CFPB was given the following three powers.

• Enforcement—The ability to enforce more than 20 consumer financial laws and regulations, which include the Truth in Lending Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, and unfair, deceptive, or abusive acts and practices as defined by the Dodd-Frank Act
• Supervision—Broad authority to examine and supervise covered persons engaging in, offering, or providing consumer financial products or services
• Rulemaking—Authority to prescribe rules and guidelines for many consumer financial laws along with many laws established under the DFA

Although the CFPB has the ability to supervise consumer financial services companies and large depository institutions, there are two critical exemptions to its authority worth mentioning.

First, the "business of insurance" is specifically excluded from the list of financial products and services subject to the CFPB's jurisdiction, as well as enforcing any provision of DFA against any person regulated by a state insurance regulator. This carve-out continued to maintain fidelity to the state-based regulatory structure for the business of insurance that dates back to the McCarran-Ferguson Act of 1945—where Congress specifically delegated the regulation of the business of insurance to the states.

Second, automobile dealerships are exempt as outlined in section 1029, which states:

The Bureau may not exercise any rulemaking, supervisory, enforcement or any other authority, including any authority to order assessments, over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles.

What Are Its Current Priorities?

In February 2016, the CFPB identified 9 priorities that it will focus its energy on for the next 2 years. Those include the following.

• Arbitration establishes a financial marketplace where consumers have the ability to effectuate their rights and hold institutions accountable for unlawful conduct.
• Consumer reporting empowers a consumer system that collects, maintains, and distributes data that are accurate and inclusive of all/more consumers. This should be supplemented by effective and efficient dispute management and resolution processes.
• Debt collectioncreates a market where everyone who collects debts substantiates the debts they are collecting, accurately identifies debtors, provides debtors with appropriate information, and communicates with debtors about their debts in a respectful, lawful, and consumer-oriented way.
• Demand-side consumer behavior enables community and public service providers with the ability to integrate financial capability skill-building into their educational and service programs, and consumers are aware of and have access to trusted tools and resources to make and act on critical financial decisions.
• Household balance sheets create policy and establish consumer education programs based on a deep understanding of the evolution of households' balance sheets and how households' use of financial products changes over time.
• Mortgages establish a marketplace where lenders serve the entire array of credit-worthy borrowers fairly and in a nondiscriminatory manner, services' processes result in fair and deficient outcomes for consumers, and new mortgage rules are implemented in a manner that supports a sustainable mortgage market.
• Open-use credit defines a market where lenders rely on business models that succeed when consumers use credit when needed and are able to repay their debts when due.
• Small business lending enforces fair-lending laws for small business and offers communities, governmental entities, and creditors access to the data needed to identify the business and community development needs and opportunities of women-owned, minority-owned, and small businesses.
• Student lending implements a structure where servicers facilitate repayment of student debt in a manner that is consistent with consumer interests, transparent and fair, and incentives encourage these outcomes.

CFPB enforcement actions have focused a great deal of energy on the marketing and sales practices of products and services. For example, in 2013–15, there were no less than four enforcement actions against lending institutions (banks and nonbank automobile finance lenders) regarding the dealer markup practices on the retail installment loan. In these examples, these lending institutions were accused of having a disproportionate amount of individuals in a protected class that received a higher "dealer markup" rate.

Final Thoughts

The CFPB has powerful and broad authority over many aspects of the financial and banking industry. The "business of insurance" is specifically carved out from the CFPB's scope, deferring the regulation of this business to the state regulatory regime. The CFPB has had a controversial start, with many controversies yet to be untangled. And, with a new administration taking shape in Washington, DC, there are many questions about how the Trump administration will impact the CFPB's authority. In his confirmation hearings, Secretary of Treasury Steve Mnuchin stated it's not feasible to eliminate the CFPB, but he did support transitioning the bureau to a commission structure, similar to the SEC.

Although much has yet to be seen, it is highly likely that the Trump administration will attempt to curb certain practices and could support legislation to arrest some of the bureau's authority and structure. But one thing is clear, the CFPB will remain a factor in consumer enforcement. With that in mind, it's important to recognize where the CFPB's authority begins and ends when compared to state insurance departments.