The Consumer Financial Protection Bureau: The name alone makes banks, lenders and other financial institutions around the country cringe because it has tremendous and wide-ranging power. It is a source of consternation for the financial services industry because they not only must meet new requirements, but also have no history with the Bureau to guide regulatory expectations.
Is The CFPB Protecting or Provoking?
The Consumer Financial Protection Bureau, or CFPB as it is more commonly known, was created in the wake of the financial crisis to act as a regulator for any consumer-facing financial institutions, including banks, credit unions, securities firms, payday lenders, mortgage servicers, and debt collectors. Recently, the Bureau also gained supervisory responsibility for the credit reporting industry.
The Bureau's creation was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama in July 2010. Still in its infancy, the CFPB began operation and immediately sparked controversy. From the get-go, the CFPB, especially the consultant in charge of its creation, Elizabeth Warren, faced Republican opposition. President Obama exacerbated this tension when he bypassed Congress and appointed Democrat Richard Cordray as CFPB Director during a recess - a move House Speaker John Boehner described as "an extraordinary and entirely unprecedented power grab." Cordray, a former Ohio Attorney General with reported future political aspirations, vowed an ambitious agenda.
On the horizon for the CFPB are companies involved in debt collection and credit reporting. These companies have earned scrutiny from state regulators and consumer protection groups because of their aggressive tactics. The CFPB also will begin monitoring those agencies that work with the Education Department on overdue student loans, of which more than $850 billion are outstanding. Debt collection companies are understandably unhappy about this development, and claim that the rise in formal complaints against them is due to greater ease of reporting online. Recently, the Bureau has also focused largely on overseeing credit card company practices and working toward a global mortgage industry settlement.
An Easy Ride or an Uphill Battle
Regardless of Republican and financial industry opposition, the CFPB has put significant funds back into the pockets of consumers and established many rules and regulations with the goal of preventing a repeat of the financial crisis that caused the Great Recession. But, with the country on the brink of a historically close presidential election, the CFPB may hit a wall.
If President Obama wins the election, the CFPB is likely to continue to grow and thrive under the administration that created it. CFPB's enforcement actions, which kicked off with a hefty $210 million settlement charge from Capital One in July, will likely increase in scope and frequency. The Bureau will more aggressively target unfair consumer financial practices while continuing to support financial literacy among the public - and, in turn, continue to establish and solidify its presence as a regulator of the financial industry.
If Mitt Romney wins, however, the Bureau could face new headwinds. The Republican nominee has made his disapproval for the CFPB and the Dodd-Frank Act that created it abundantly clear. His argument against the Bureau asserts that the actions of the CFPB are strangling our country's economic recovery by restricting credit and lending, and that the Bureau has too much power and is protected from Congressional oversight (it gets its funding from the Federal Reserve).
Romney proposes to revise or repeal Dodd-Frank, saying the legislation has "gone beyond what was appropriate." Moreover, Romney's running mate, Paul Ryan, led the House Financial Services Committee when it proposed to cut the CFPB's 2013 budget by more than half. Despite his party's opposition, many analysts believe Romney has bigger fish to fry - i.e., jobs, healthcare, reducing the deficit - and that restricting the CFPB may not be high on his to-do list.
Like many other issues, the two candidates - and their respective parties - don't see eye to eye when it comes to the CFPB. Come November 6, the CFPB may find itself with a clear path forward, sharp curtailment of its power, or the end of the line. Investors in financial services companies should take note of these developments because they will significantly affect the industry.
Article written by: Kathleen Wailes and Kate D'Amico