WASHINGTON — Depending on which political party you talk to, the Consumer Financial Protection Bureau is either the most powerful federal agency ever created, or the most constrained.
While the truth lies somewhere in between, one thing is clear: Most of the claims made about the CFPB just aren't true. Republican assertions that the agency enjoys an unlimited budget and is exempt from congressional oversight, for example, are demonstrably false. But Democrats' contention that the CFPB is a severely restricted agency is also misleading.
"Like a lot of these things, it's a little of both," said Karen Shaw Petrou, a managing partner with Federal Financial Analytics. "There's no question that other banking agencies are powerful, and the two I would cite immediately that are independent — i.e., not subject to the president and exempt from the appropriations process and somewhat limited accountability ash; are the Fed and the FDIC."
But, she said, the statute gave the CFPB a "terrific amount of authority, and far better protection from political interference or judgment … than is often the case for most regulators."
With that in mind, we offer a guide designed to separate fact from fiction concerning the CFPB.
Myth No. 1: The CFPB is the most powerful agency to ever exist.
In an interview with CNBC in March, Tom Donahue, the chief executive of the U.S. Chamber of Commerce, called the CFPB "the most powerful regulatory agency that's ever been put together." House Financial Services Committee Chairman Spencer Bachus and other top panel Republicans have all echoed similar claims.
So what are these new, sweeping powers the CFPB has? Well, for starters, most of the agency's authority is not new at all, but transferred from other federal agencies. That includes enforcement of dozens of different consumer financial rules, such as the Home Ownership and Equity Protection Act and Home Mortgage Disclosure Act.
Like other agencies, it has the power to hold hearings and subpoena witnesses and documents. It can also issue cease-and-desist orders and penalize individuals upward of $1 million for each day they are in violation of a consumer law. It is the only bank regulator that can take a bank directly to court on any fair-lending matter, rather than having to go through the Justice Department.
One "new" power is a twist on an existing one bank regulators previously had. Before Dodd-Frank, the Federal Reserve Board could ban "unfair or deceptive" practices, a power the agency used only sparingly. But the CFPB has the power to define "unfair, deceptive or abusive" practices in connection with consumer products. Unlike the Fed, the new agency is expected to be much more proactive in pursuing practices it deems are inappropriate. By adding "abusive," the CFPB also may have additional leeway that other agencies did not.
Another provision of Dodd-Frank allows the CFPB to consider whether a bank has taken advantage of the consumer's reasonable reliance on the provider to watch out for the consumer's best interest. Some observers see that as significant new authority. "There is so much power in that statement … it's almost a carte blanche," said Jo Ann Barefoot, the co-director of Treliant Risk Advisors. "I definitely think that there's more power and latitude in the CFPB than most of the comparable agencies."
But the primary difference is the agency's focus. Instead of having other concerns, like safety and soundness, that might take priority over consumer issues, the CFPB is just worried about one thing: borrower protection. The real fear is not that the agency is much more powerful, but that unlike the bank regulators, it may use its authority.
Still, the bureau doesn't exactly have a blank check to do what it wants. Dodd-Frank includes some unique requirements that other banking regulators do not face, including that it must consider the potential costs and benefits of any new rule to both consumers and providers, and must consider the impact of proposed rules on community banks and smaller credit unions, and on consumers in rural areas. It's worth noting that it must, like other federal agencies, comply with the Administrative Procedures Act, which requires regulators to allow the public to comment on any rule before it is finalized.
"In terms of the powers themselves, I don't think that there is a huge advantage that they hold," said Donald Lamson, a former bank regulator who was detailed to the Treasury Department in 2009 to help draft the administration's regulatory reform proposal. "Instead, they've got a focus that previously no regulator had. Some people would say that that's an advantage, that in the past banking agencies have not used their authority, so it's appropriate to use it now. Now where is the right balancing point? Time will tell."
Myth No. 2: CFPB has virtually unchecked authority.
Rep. Patrick McHenry, R-N.C., claimed last month that the CFPB will possess virtually unchecked discretion. Although observers said Republicans have legitimate concerns about the effectiveness of checks and balances for the CFPB, it's simply untrue to say that they don't exist.