July 4 was America’s Independence Day but today marks the new Consumer Financial Protection Bureau’s independence from the U.S. Treasury and its formal establishment as an independent bureau within the Federal Reserve.
The CFPB’s job is to protect and educate buyers of financial products like home loans and credit cards. Derailing its establishment was a prime goal of banks and their lobbyists during the regulatory reform debate in 2009 and 2010 that followed the Great Recession. The country’s newest regulator faces more fights in Congress from lawmakers who would water down its powers. These are fights worth having—and winning.
Financial markets only work when all participants have access to good information that drives rational economic choices. It’s essential that consumers finally have a strong watchdog in Washington making sure that sellers of complex financial products play fair with their customers in the aftermath of a financial crisis caused by a failure of the U.S. housing market.
The bureau will mark its birthday by launching its supervision program of large banks. “Starting on July 21, we will be a cop on the beat—examining banks and protecting consumers,” said Elizabeth Warren, the Harvard law professor who has spearheaded the bureau’s creation. CFPB examiners will fan out to the 111 banks with assets of more than $10 billion and their subsidiaries, checking that their consumer financial practices meet legal requirements. The big banks hold more than 80 percent of all assets in the banking sector, according to the Treasury Department.
Chief among the CFPB’s accomplishments this year was the unveiling of an in-progress redesign of mortgage disclosure forms, a welcome indication that the bureau is committed to a far higher standard of effective disclosure than government typically requires. The “Know Before You Owe” initiative’s emphasis on user-testing the forms for clarity and usability is an improvement on the traditional rulemaking process that other agencies should emulate.
In addition, officials of the nascent agency have already met with community bankers in all 50 states, held a conference on the one-year anniversary of the credit card reform CARD Act, and set a new standard for public engagement and transparency through social media, feedback-seeking websites, and online videos. Sustaining that user-friendly approach will be critical if the bureau is to fulfill its goal of increasing consumer financial literacy.
Regrettably, the CFPB comes into official existence without the leader President Barack Obama credited for having envisioned it. In the year since the passage of the so-called Dodd-Frank regulatory reform bill creating the bureau, Warren, its outspoken advocate and unofficial director, has faced unusually rough treatment at the hands of GOP lawmakers in the House.
The president this week nominated the bureau’s enforcement chief, Richard Cordray, for the top spot. Sen. Jerry Moran (R-KS), a member of the chamber’s Banking Committee, has called Cordray’s nomination “dead on arrival,” at least unless the CFPB’s powers are weakened by a GOP bill.
Here’s hoping more moderate minds prevail on Capitol Hill. The Senate should confirm Cordray and let him get to work enforcing consumer protection laws, monitoring markets for unfair and deceptive practices, and educating consumers about the most important financial decisions they make. Our current economic travails—which stem from a breakdown in the consumer mortgage markets—are a constant reminder of the need for a strong cop watching out for consumer interests.
“If there is a lesson from the past five years, it’s this,” wrote Warren in a blog post this week. “We all lose when consumers cannot readily determine whether they can afford to pay back their loans. We all lose when lenders routinely sell credit in ways that hide the risks and costs. We all lose when a broken consumer credit system magnifies risks throughout the economy. We can do better.”
Gadi Dechter is Associate Director of Government Reform at the Center for American Progress.
- America’s Next Top Model Disclosure by Gadi Dechter (The Hill)