Internal Changes Have Helped the CFPB, but Comprehensive Reform Still Needed

When Kathy Kraninger was selected to lead the Consumer Financial Protection Bureau, many welcomed her nomination as a sign that change was underway at an agency with a laundry list of problems. Her detractors suggested she would allow corporations to run amok to the great detriment of consumers. After more than half a year at CFPB’s helm, Kraninger appears to be making progress on internal reforms to one of Washington’s broken agencies while disproving the fear-mongering of her critics.

Prior to her arrival, the CFPB primarily sought to regulate “unpopular” businesses out of existence, with the small-dollar loan rule serving as one of many examples. This approach, employed by former Director Richard Cordray, is the embodiment of why oversight and transparency are needed to hold bureaucrats accountable for their actions. Instead of adequately protecting consumers, Cordray’s CFPB imposed crushing paperwork regulations on small community banks and credit unions. According to an analysis by the American Action Forum, Cordray’s rules totaled $3 billion in new burdens, $634 million in annual costs, and 21 million new hours of paperwork.

Director Kraninger has so far crafted a different agenda that promotes choice, consumer education, competition, and innovation. Most importantly, the CFPB has properly focused  on minimizing regulatory costs while maximizing consumer benefits. She has so far lived up to the promises she made during her confirmation process.

Of course, any developments to change the CFPB for the better are met with hostility from those who believe the CFPB was running perfectly under Richard Cordray. When Director Kraninger was in the confirmation process many legislators resorted to fear tactics to scare Americans and turn public perception against her. For instance, Senator Sherrod Brown (D-OH), ranking member on the Banking Committee, irresponsibly claimed she didn’t care about the people she was supposed to protect, stating, “She is not on the side of people who work for a living, she is on the side of big corporations.”

These words are far from reality. In the process of reforming the CFPB from within, the Bureau hasn’t lost sight of its congressionally mandated purpose of protecting consumer interests. Just in the last six months, the Bureau received and responded to 170,000 complaints. The Bureau has also expanded educational opportunities for consumers to learn about financial products and money management. Equally important, however, CFPB is also preparing to launch an Office of Innovation and an Office of Cost-Benefit Analysis to better gauge the effects of rules and regulations. 

Perhaps the single greatest flaw of most government rulemaking is the lack of systematic processes to evaluate the net impact on the public and private sector of a new edict or mandate. An overzealous bureaucrat can develop a justification for almost any action based on the idea that someone, somewhere, might benefit from it. But once a rule’s proponent is required to tally the costs -- such as misprioritized government enforcement resources, private-sector out-of-pocket compliance expenses, distortions to the marketplace, and lost opportunities to innovate products or services consumers could have enjoyed -- the picture can change dramatically. Across government, cost-benefit analyses have better aligned regulators’ priorities, including at the Federal Trade Commission and the Internal Revenue Service (IRS). Last year the tax agency concluded an agreement with the Office of Management and Budget (OMB) to subject “significant” IRS rules to OMB review -- a process that will dramatically improve the administrability of tax regulations. 

Just recently, the CFPB announced yet another sound proposal for reforms to how a “Qualified Mortgage” is defined for underwriting at Fannie Mae and Freddie Mac. If pursued thoughtfully, this could be a welcome step in bringing change to the government’s role in the housing finance system. Currently, what’s called a “QM patch” has governed Fannie and Freddie’s practices, significantly increasing those Government-Sponsored Enterprises’ share of the mortgage market and thereby leaving taxpayers to back hundreds of billions of dollars in additional risk. By letting the QM patch expire and exploring a more transparent rule that’s consistent for all government and private participants in the market, CFPB can help bring clarity, competition, and innovation to this area of finance.

Despite these positive developments, taxpayers should be concerned that the CFPB still remains one of the most powerful and least transparent agencies of the federal bureaucracy. Unlike the vast majority of other agencies in government, the Bureau is not directly funded by Congress. Since the CFPB doesn’t need congressional approval to access resources, there is “no power of the purse” to control an agency with significant regulatory power. Further, the sole director, whom a federal judge described as the “single most powerful official in the entire United States Government” besides the president, cannot be removed and can implement any policy they see fit. The structure of the CFPB is fundamentally flawed and virtually unanswerable to the president, Congress, and most importantly, American taxpayers.

That’s why NTU has long supported legislation to reform the CFPB through the normal appropriations process, implementing a bipartisan commission structure similar to the FTC or FCC. These reasonable changes should garner bipartisan support - especially among republicans, because when it comes time to nominate a new leader, Director Kraninger’s successor may not be committed to the same successful vision and could use the CFPB’s unaccountable  power to reverse all the positive changes. 

The CFPB is a notable example of how a rogue agency can be reined in under better leadership. Director Kraninger has made the Bureau more accountable to taxpayers and consumers. Hopefully that progress will continue. Now it’s up to Congress to institute reforms and proper oversight mechanisms to this agency before it’s under new, unpredictable leadership.