University of Illinois law professor Robert M. Lawless, a leading consumer credit and bankruptcy expert, discusses with News Bureau business and law editor Phil Ciciora the future of the Consumer Financial Protection Bureau, the federal consumer watchdog agency created in the wake of the Great Recession to safeguard borrowers against fraudulent lending practices.
Why is there a sudden impetus to reorganize the Consumer Financial Protection Bureau?
For starters, the creation of the Consumer Financial Protection Bureau was never a bipartisan effort. The CFPB came out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which itself happened because of the Great Recession and the groundswell for reform of the financial industry. I think if we hadn’t had that political moment, we wouldn’t have a CFPB.
The impetus is that now we have a different political moment. The impetus is not “sudden.” The forces that opposed creation of the CFPB never went away. What has changed are not their arguments but a political landscape in which those arguments might prevail.
The substantive arguments for reform go to the structure of the bureau. The main argument is that power is vested in a single person – Richard Cordray, whose term expires in 2018 – although it’s not the only federal agency to have that feature. Critics argue that having this unfettered discretion vested in one person is bad for both business and democracy.
How effective has the CFPB been?
The CFPB has been very effective in passing new regulations that help consumers navigate the financial system. Right now, there are two proposals that they’re working on. One is a proposed rule to ban arbitration in most consumer financial product agreements. The other is a regulation that would greatly decrease the scope of payday lending.
If Cordray stays in place as director, these regulations likely go forward. If Cordray is removed or the CFPB is hamstrung legislatively, then those regulations probably don’t go forward.
Congressional Republicans, who tend to be CFPB critics, would have tools at their disposal to get rid of these regulations, but that might require politically difficult votes. So it’s politically easier just to get rid of Cordray and let these proposed regulations die a silent death.
Does the president have the power to unilaterally dismiss the CFPB director?
In October, the U.S. Court of Appeals for the District of Columbia ruled that the structure of the CFPB was unconstitutional. They said the director serves at the pleasure of the president, and not a five-year term. What that would mean is the president could replace the director of the CFPB at the drop of a hat, just like he can replace most federal officials and Cabinet secretaries. That case is still pending. There is a petition for rehearing and it may end up at the U.S. Supreme Court.
Since Cordray’s term expires in 2018, at some point there will be a Trump appointee. But if Cordray is replaced before then, that would change the entire scope of what the CFPB is doing right now.
The ironic thing is, with a Trump appointee, the tables could be turned. Consumer financial advocates all of a sudden might not like the idea of an unfettered CFPB director who could give regulatory blessing to questionable lending practices. The idea of “regulatory capture” holds that administrative agencies often end up as allies of the industries they’re supposed to be regulating. One of the arguments for the creation of the CFPB was that federal regulators had been captured by the consumer lending industry. I have never heard any good arguments to explain why the CFPB will prove to be an exception to this historical pattern.
What impact would a defanged watchdog have on consumers?
Take the issue of reverse mortgages, which the CFPB has been investigating. In my view, that’s a financial product that has been underinvestigated and underregulated, and is ripe for examination.
Data suggest there may be a silent debt crisis among the elderly. People over the age of 65 are filing for bankruptcy at four times the rates they were 25 years ago. As just one example, it’s possible the demise or the neutering of the CFPB could disproportionally affect older Americans, who have an increasing vulnerability to debt problems.
Bear in mind that even a weakened CFPB wouldn’t mean there aren’t other laws or regulations to go after issues such as fringe lending. State laws and state regulators, such as the state attorneys general, would play a stronger role in policing consumer finance abuses. But these efforts will never be able to match the ability of a strong federal watchdog to act as a check on predatory lending.