The recent failures of three banks—Silvergate Capital, Silicon Valley Bank (SVB), and Signature Bank—are a reminder of the importance of strong financial laws and regulations to ensure that financial institutions operate in a safe and sound manner and that the public is protected. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Department of the Treasury all stepped in to avert the worst consequences for these banks’ depositors and facilitated the sale of assets to other banks. The decisions to backstop affected deposits and provide much-needed liquidity were crucial to quelling public uneasiness and containing further runs within the banking system—all without rewarding mismanagement by the bank owners.
One critical financial regulator is the Consumer Financial Protection Bureau (CFPB), with a mission focused solely on protecting consumers from unfair and abusive practices by banks and nonbank financial actors, such as mortgage banks and payday lenders. Even as the recent failed banks’ mismanagement is being revealed, the CFPB faces legal threats to its independence and its ability to fulfill its mission.
Banks sometimes prioritize short-term gains over sound risk management, and in the process, create potential risks to the financial system. Those same attitudes can extend to the treatment of their retail customers with respect to unfair loan restrictions, abusive fees, and deceptive practices.
CFPB’s independence is under threat as greater regulatory scrutiny in the banking sector is needed
Congress established the CFPB in 2010 when public trust in the banking sector plummeted following the 2007-2008 financial crisis. More than a decade since its inception, the CFPB has exercised its independent authority to promote a fairer financial marketplace and to hold institutions accountable for poor practices. However, the agency’s independence is under threat, even as recent bank failures underscore the need for greater regulatory scrutiny.
The CFPB’s congressional architects recognized that insulating the agency from political influence was central to carrying out its important mission and set up the guardrails needed to do so. For example, Congress established a funding mechanism for the agency that relies on fees the Federal Reserve levies on financial institutions—similar to the funding of other financial regulators—rather than annual congressional appropriations. CFPB detractors have mounted numerous legal challenges aimed at chipping away at the agency’s autonomy, with the latest targeting its funding structure.
Last fall, in a decision that lacked legal precedent, the U.S. Court of Appeals for the 5th Circuit ruled that the CFPB’s funding source was unconstitutional. The 5th Circuit’s decision also sharply differs from a recent ruling from the 2nd Circuit, which dismissed claims that the CFPB’s funding violates the Constitution’s Appropriations Clause. The 5th Circuit case was appealed to the U.S. Supreme Court, which has accepted the case for consideration in its next term. In short, if the Supreme Court upholds the 5th Circuit’s opinion, the CFPB’s funding, its capacity to protect consumers, and potentially the financing of other federal agencies could be more vulnerable to political motives. House Republicans have also taken aim at the CFPB, introducing legislation that would subject the agency to annual congressional appropriations. Additionally, they recently held a hearing on their proposals to weaken the CFPB just as SVB and other firms were on the brink of collapse.
An independent CFPB is central to promoting consumer interests—especially during periods of uncertainty
The CFPB’s work is central to protecting consumers’ interests. For example, it implements and enforces federal consumer financial laws, including the Truth in Lending Act; Real Estate Settlement Procedures Act; Equal Credit Opportunity Act; and Fair Credit Reporting Act, which govern a wide array of financial products and services. Since 2011, the CFPB has responded to more than 3.3 million consumer complaints and returned $16 billion directly to consumers, helping 192 million people.
Through its rulemaking, supervision, and enforcement authorities, the CFPB has fought discriminatory practices in lending and fees that contribute to the racial wealth gap, including 323 enforcement actions, with $3.7 billion in penalties collected for violations of fair lending laws. Additionally, as part of President Joe Biden’s commitment to rein in junk fees, the CFPB has examined fees imposed by banks and credit card issuers, supporting a recent proposal to limit credit card late fees that could save Americans $9 billion per year. The presence of a robust CFPB can even encourage market discipline. Academic studies have shown that the threat of consumer complaints to the CFPB influences banks to lower fees.
A politicized CFPB would create barriers to the agency’s ability to fulfill its important mandate. If upheld, the 5th Circuit decision would fuel uncertainty around its funding and, by virtue, its capacity to carry out its mission. The more immediate effect of the decision is that it leaves more than 100 regulations the CFPB has finalized since its formation in 2011 vulnerable to further legal challenges.
At the same time, bank regulators are rushing to analyze factors that contributed to the instability in the banking sector. The expected tightening of oversight of medium-sized banks will ultimately help promote a more resilient and reliable banking system for the individual and business customers that they serve. In response, banks may take steps such as restricting lending or increasing user fees, which could place an uneven burden on the most vulnerable individuals and communities. When these decisions are made, credit needs do not disappear, and some borrowers are forced to turn to lightly regulated or unregulated and costly alternatives. The coming months of regulatory scrutiny only reinforce why consumers need a strong and independent CFPB.
The recent bank collapses emphasize the need for both a more rigorous regulatory framework and independent oversight of consumer protections. To carry out its important mandate and help create an economy that works for everyone, the CFPB’s independence should be preserved.