House Committee Chairs Blast CFPB's "Virtually Limitless Power"

Shortly before recessing for the holidays the Chairmen of the House Committee on Oversight and Government Reform and of its Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs issued a report titled The Consumer Financial Protection Bureau's Threat to Credit Access in the United States.   The creation of CFPB was a central fixture of the Dodd Frank Wall Street Reform and Consumer Protection Act and has been the target of both the banking and finance communities and Republican members of Congress 

The report by Committee Chair Darrell Issa (R-CA) and Subcommittee Chair Patrick McHenry (R-NC) claims that the Dodd-Frank Act gave the Bureau "virtually limitless power" and "the real potential to severely reduce credit access for American consumers."  

Unlike other independent financial regulators like the Federal Reserve or the FDIC, they say, CFPB is run by a single director instead of a bipartisan or nonpartisan commission (Ed. note:  the FDIC is an independent agency run by a chairman and Board of Directors) and is not subject to annual congressional appropriations nor are its regulations reviewed by the office of Management and Budget.  This allows the CFPB to be a rogue financial regulator with potential to create uncertainty for providers of consumer financial products and services.

It slams the appointment of its first director, Richard Cordray as "controversial and legally questionable and says it generates uncertainty for financial service providers and American consumers because a court could invalidate that appointment.   Cordray was given a recess appointment by the President after the Senate refused to allow the confirmation of anyone to the position.  The two representatives find further unsettling that the Bureau has no "Plan B" for operating effectively should a court find the appointment illegal.

They question the Bureaus "development as an independent regulatory agency" and claim the Obama Administration is attempting to use it to further a partisan agenda, calling a visit by the President to the Bureau a few days after Cordray's appointment, a "victory lap," and citing meetings and emails between Bureau and Administration staffers as evidence the Administration is using the Bureau for partisan purposes.  

Issa and McHenry say that their committees have closely monitored the CFPB since its creation and have become increasingly concerned that its rulemakings and enforcement actions could diminish credit access for eligible consumers.  This access has already declined for both consumers and small businesses they charge as banks have tightened lending standards in response "to burdensome Dodd-Frank regulations and an uncertain business environment."

"Other than student loans, which are almost completely now backed by the government, and auto loans, our credit markets remain constrained.  Furthermore, as a result of the Credit Card Accountability Responsibility and Disclosure Act which the CFPB is in charge of implementing, interest rate spreads for credit card loans have increased, making it more difficult for eligible borrowers to access the capital they need for their businesses.  Mortgage lenders are reportedly requiring the highest credit scores in a decade to approve home mortgages, with an average credit score of 737 for borrowers approved for a home loan in 2011.

Small banks and community lenders are especially overwhelmed by the onslaught of "red tape".  Issa and McHenry blame the regulatory requirements of Dodd-Frank Act for the closing or sale of many small banks. "More alarmingly, because only 33 percent of the 400 rulemakings required by the Dodd-Frank Act have been implemented fully, the total extent of the Act's effect on credit cannot yet be accurately measured."  The report quotes the Cato Institute that CFPB's actions have already raised the cost of consumer credit by at least two full percentage points or $17 billion and depressed job creation by about 150,000 jobs.

The report says that the Bureau's mandate and structure have predisposed it to tighten restrictions without considering the affect consumer lending.  "This could decrease credit availability, make credit more expensive, hurt small businesses, stunt job creation, and jeopardize a full economic recovery."

The Bureau's Dodd-Frank mandate empowers it to prevent "unfair, deceptive, or abusive" financial services or products.  The chairmen devote a lot of attention to what it calls the Bureaus refusal to define "abusive" in this context,  The terms "unfair" and "deceptive" have established meanings in case law and regulation, they say, but "abusive" has no well-established definition and the CFPB has shown no willingness to define the term.

"This uncertainty creates a chilling effect on financial institutions that are reluctant to lend due to the litigation risk that could follow from the amorphous definition of "abusive."  The refusal to define the term "abusive" "raises a lot of doubt and uncertainties in the minds of financial institutions," causing lenders to restrict certain credit products and services.

According to the chairmen, CFPB appears poised to enact burdensome regulations that will restrict consumer credit access. Noted was a rule to regulate international remittance transfers sent by individuals to consumers overseas.  A Texas bank (which also sued over the abusive definition issue) has stopped overseas remittances and has sued CFPB.  The report estimates that 3,000 to 4,000 other community banks and possibly that many credit unions will exit the remittance transfer business over the rule.

Issa and McHenry say that recently proposed and forthcoming mortgage regulations have received significant negative feedback especially a proposed rule to integrate mortgage disclosure forms required by two different regulatory acts.  A credit union representative said that it would be difficult to review the 1,100 pages of the proposal and thus some smaller credit unions may "simply throw up their hands and quit making mortgage loans."

CFPB is currently considering another mortgage rule that would require a lender to verify a borrower's ability to repay a mortgage that does not satisfy the definition of a "qualified mortgage."  The report said this rule could increase the cost of mortgage lending, reduce consumer choice, and make it harder for consumers to compare mortgage options.

Another rule to supervise large debt collectors may make it more costly for lenders to collect debts owed by consumers.  Thus lenders will become more hesitant to extend credit in the first place.

Finally, Issa and McHenry charge that CFPB has a weak reliance on economics that prevents an evenhanded examination of its regulatory actions.  "Whereas other independent agencies like the SEC have an independent division dedicated to methodical and unbiased economic analyses, the CFPB relies on a tiny office led by a part-time director with an apparent predilection toward restrictive regulations" This makes it likely that CFPB would be unaware of harm its actions might do to credit access among some segments of the population."

The Bureau also does not perform adequate cost-benefit analyses in its rulemakings and has failed to adequately assess reduced credit access as a cost to its regulations. While other independent financial regulators have improved their cost-benefit analyses, "the CFPB has given no indication that it would consider enhancing its own cost-benefit procedures."

Similarly, there is concern that the Bureau could regulate informally - bypassing traditional notice-and-comment requirements - by coercing financial institutions to act "voluntarily."   Without the certainty of thorough notice-and-comment rulemaking, lenders will be less likely to extend credit.  

The report concludes by saying the CFPB has been given carte blanche authority to regulate the offering of consumer financial products and services in the United States, "but it lacks the necessary institutional and external controls typically found in an independent agency.  As a result, the CFPB is uniquely positioned to drastically - and perhaps unalterably - affect the consumer credit market for American families and small businesses. With a growing divide between American consumers and businesses with and without adequate access to credit, the CFPB must be mindful to ensure that the United States retains a vibrant, robust, and fully accessible credit market."

MND has asked CFPB for its response to the report but has not yet heard from the agency.