Democrats Exhibit Amnesia on Likely CFPB Failures

Democratic politicians and supportive media voices have recently blasted President Donald Trump for ordering a temporary halt to the work of the Consumer Financial Protection Bureau (CFPB) – to be followed by a reduction in its future operations under the leadership of a new director nominated by the president. While the legality of Trump’s action will be assessed by the courts, there is certainly good reason, on policy grounds, to reduce the CFPB’s scope of operations and (through Congressional action) to render it more accountable to the nation’s elected officials.

The CFPB, the brainchild of Massachusetts Senator Elizabeth Warren, was established by the Obama administration as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. What was most novel about the new agency was not so much its sweeping, open-ended mandate to regulate potential abuses by “non-bank entities,” but its mode of financing.

Under Dodd-Frank, the CFPB’s funding would not derive from congressional budget allocations. Instead, the agency would be financed by direct annual payments from the “profits” earned by the Federal Reserve – along with assorted fines and fees the agency collected from those who violated its regulations.

In other words, once the CFPB was established, the people’s elected representatives would have no say over its operations or expenditures. This independent mode of financing made the bureau unique among federal regulatory agencies.

Moreover, given the government’s current financial situation, the Fed earns no annual “profits,” and only reports losses. As a result, the cost of its subsidy to the CFPB is borne by taxpayers no less substantially, even if more indirectly and hence obscurely, than other federal expenditures.

As syndicated columnist and economic analyst Phil Kerpen recently noted in the Jacksonville Journal-Courier, the CFPB has done far more harm than good to the housing market and to the economy as a whole.

As is widely known, the housing collapse and subsequent financial crisis in 2008 were caused in large measure by the government’s having politicized the eligibility criteria for housing loans, encouraging banks to lend to buyers with doubtful capacity to repay the loans – all in the name of “social justice.” The lending crisis spread throughout the economy thanks to investors’ having been encouraged to purchase “packages” of subprime loans, and banks being allowed to record those risky loans as part of their “assets” for regulatory purposes.

Unfortunately, as Kerpen notes, Dodd-Frank added even more politicization by creating the CFPB, which has “raised costs and pushed many financial services beyond the reach of the consumers it purports to protect.” It has done so by increasing closing costs thanks to added paperwork requirements. Furthermore, Kerpen reports, “a lot of the money the bureau collects in fines and fees ends up in a slush fund called the Civil Penalty Fund to be funneled to left-wing social justice groups.”

Additionally, “the agency even tried to do the one thing Congress expressly prohibited it from doing – regulate auto-lending,” a move that was overturned in a Congressional Review Act resolution during Trump’s first term in office.

The most remarkable response to Trump’s attempt to reduce the CFPB’s powers and increase its accountability is a column by the Democrat authors of the Dodd-Frank law, former Senator Chris Dodd and former Representative Barney Frank, in The Wall Street Journal.

As the authors recall, as respective chairmen of the Senate Banking and House Financial Services Committees in 2006, they initiated hearings that focused on “the dangers to the economy” deriving from the awarding of sub-prime mortgages. Messrs. Dodd and Frank portray the hearings as an offshoot of the Home Ownership and Equity Protection Act signed by President Clinton in 1994, which “empower[ed] the Federal Reserve to prevent the issuance of loans that borrowers would have great difficulty in repaying.”

According to them, since Fed Chairman Alan Greenspan “declined to use” the authority that the 1994 Act gave him, believing that “the political benefits of wider homeownership outweighed the risk of wider defaults,” it wasn’t until the 2006 hearings that Greenspan’s successor, Ben Bernanke, was prodded to try to utilize the powers that the 1994 act provided him.

But the Dodd-Frank law that followed the crisis was intended to do more by “prohibit[ing] the granting of mortgages that burden home buyers beyond their capacity to repay” and restricting “the ability of lenders to avoid financial responsibility for extending loans that do default.” Enforcement of these rules was assigned to the CFPB, which “had [it] existed in 1994 with a mandate to curb the growth of imprudently granted mortgages as part of its core mission” would have made America’s “financial history… a lot less gloomy.”

Coming from Barney Frank, this account of the mortgage crisis is simply hilarious. Back in 2003, as a senior member of the House Committee on Financial Services, Frank famously remarked that rather than restrict the issuance of risky mortgages, ”I want to roll the dice a little bit more in this situation” – by pressuring banks and other lenders to issue loans to home buyers who would not have qualified (in the words of economist Thomas Sowell, writing in 2010) “under the standards which had long prevailed, and had long made mortgage loans among the safest investments around.”

“To those who warned of the risks in the new policies,” Sowell recalled, Congressman Frank replied that they were “exaggerate[ing] a threat of safety” and “conjur[ing] up the possibility of serious financial losses to the Treasury, which I do not see.”

By disclaiming responsibility as early as 2010 for the policies he had espoused only seven years earlier, Sowell observed, Frank demonstrated that he was “in a class by himself when it comes to rewriting history in creative ways.” As his latest co-authored column indicates, even out of office, Frank hasn’t lost that capacity. In sum, one is tempted to say, ex-Congressman Frank was rather “un-frank” in describing the actual effects of his namesake bill, which is as thoroughly misnamed as Joe Biden’s so-called “Inflation Reduction Act.”

Critics of the CFPB should not be swayed by Frank’s latest claims any more than they should have been in the past. Indeed, on January 7, in the last days of the Biden administration, the CFPB announced that it was prohibiting lenders from taking account of borrowers’ medical debts in compiling their credit reports, thereby removing $49 billion in medical debt from the credit reports of more than 15 million Americans.

The result, it was promised, will be the issuance of 22,000 additional home mortgages each year. However humane such a rule may appear, it would seem directly to contradict the supposed rationale for Dodd-Frank, to prevent the sort of subprime lending that led to the 2008 crisis in the first place.

One wonders how “compassionate” it actually is to induce banks to make loans to more people whose real financial condition will make it harder for the recipients to repay them. The new rule exemplifies a return to the elevation of supposed “social justice” over economic sanity that led to the previous crisis – the real guiding concern of the CFPB ever since its inception.

The CFPB clearly needs to have its purposes clarified, its powers reined in, its mode of financing made subject to the regular budget process, and its leadership made more democratically accountable. President Trump’s actions seem to be a positive first step in that direction.

David Lewis Schaefer is a Professor Emeritus of Political Science at College of the Holy Cross.