Above: watch Professor Elizabeth Warren explain the CFPB.
What is the Consumer Financial Protection Bureau (CFPB)?
The CFPB will be a federal agency whose mission will be to protect consumers from dangerous financial products and practices. This will include credit cards, mortgages, debit cards, consumer loans, payment systems, bank accounts, and more. Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010, the Bureau will be up and running in 2011.
An Agenda for the new Consumer Bureau
Direct from our friends at the National Consumer Law Center, here are some priorities the CFPB must address when it is formed. See this information in PDF format here.
Mortgages. The CFPB must make the mortgage market safe for all participants to prevent another economic and family crisis. The Bureau must:
- Develop clear rules to ensure that all lenders adequately consider ability to repay;
- Stop brokers and mortgage lenders from steering homeowners into loans more costly than those for which they qualify;
- Require mortgage servicers to consider loan modifications where appropriate prior to foreclosing and restrict them from imposing unwarranted servicing fees and force placed insurance;
- Create a strong system to supervise nonbank mortgage lenders.
Credit cards. Congress adopted important protections in 2009, but the work is not done. The CFPB will need to:
- Monitor the credit card market to address violations and evasions of the Credit CARD Act;
- Prohibit complicated terms and hidden traps in credit cards so that consumers can shop for the best card without being hit with back-end surprises;
- Stop predatory marketing of credit cards to struggling consumers;
- Require credit card companies to disclose an APR that reflects the true cost of a credit card, including all fees.
Overdraft loans. New rules now requiring consumers to “opt in” to overdraft fees on their ATM and debit cards are only the first step. To address the overdraft abuses that remain, the CFPB must:
- Ban aggressive and deceptive tactics to induce opt-ins to overdraft fees;
- Limit excessive fees (in number and amount) that far exceed the costs of overdrafts;
- Prohibit bank tactics to increase overdraft fees, such as reordering transactions to cause overdrafts earlier in the day;
- Require banks to inform consumers of less expensive overdraft protection options.
Payday and auto title loans. Payday and auto title lenders, including some banks and credit unions, make loans at 400% or more until the next payday. The CFPB cannot set usury caps. But to address other pernicious aspects of high cost lending, it should:
- Ban dangerous forms of security, including check holding, electronic access to the consumer’s account, and holding car titles;
- Stop the evasion of usury caps through junk fees and other ruses;
- Crack down on reckless lending that, due to high price, short repayment time, or failure to consider ability to pay, is unaffordable for a high proportion of borrowers;
- Protect Social Security, unemployment insurance, and other exempt funds from these lenders.
Auto loans. The CFPB will have jurisdiction over most auto lenders and some car dealers, with the FTC handling the remainder. To bring fairness and transparency to the auto lending market, the CFPB and the FTC together must:
- Prohibit kick-backs to dealers who put consumers in more expensive loans;
- Prohibit bait and switch tactics through “yo-yo” clauses that give dealers a unilateral right to cancel the sale or loan;
- Ensure that the condition of used cars is accurately represented to borrowers and lenders by requiring independent inspections and disclosure of known defects.
Private student loans. Federal student loans have a variety of protections, but private student loans can be much more dangerous. The CFPB must:
- Prohibit lenders from pushing students to take on more expensive and riskier private loans without first exhausting their federal aid;
- Work with private lenders to develop flexible, income-based repayment, loan modifications, and other debt management tools;
- Stop predatory lending by proprietary schools and protect students from
- responsibility for loans used at schools that close or defraud students.
Prepaid debit cards. Consumers fed up with bank accounts, and unbanked public benefit recipients and workers, are increasingly using prepaid cards. Though the cards have many benefits, the CFPB needs to beef up spotty legal protections in order to:
- Ban inappropriate fees, such as fees to check the card’s balance, overdraft fees, and denied transaction fees;
- Give consumers full protection from loss, theft or unauthorized charges;
- Ensure that consumers can get statements and other convenient forms of transaction information;
- Prohibit prepaid cards that hold wages or public benefits from using those funds to secure predatory payday loans.
Credit reports. A consumer’s credit report impacts not only the price and availability of credit but also auto and homeowner’s insurance and employment. The CFPB must:
- Force creditors and credit bureaus to clean up a system that produces reports prone to mistakes such as incorrect and outdated information, fraudulent accounts due to identity theft, and mixed up files of different consumers;
- Reform the credit bureaus’ travesty of an automated system for addressing consumer disputes with credit reports;
- Address racial disparities in credit reports, which impact not only credit pricing and availability but also employment and homeowners and auto insurance;
- Make credit scoring fairer and less opaque to consumers and policymakers;
- Restrain credit bureaus from sweeping new data, such as utility payments, into the credit reporting system if the benefits are outweighed by the harm to vulnerable consumers.
Debt collection. The Federal Trade Commission receives more complaints about debt collectors than any other industry, more than 120,000 in 2009. The responsibility to address these problems now passes to the CFPB, which needs to:
- Stop the widespread use of illegal threats and harassment, and practices that often lead to collection of the wrong amount or from the wrong person;
- Bar collection of “zombie debt” that never dies but is sold and resold to the next debt buyer even if the consumer disputes it or it is too old to be legally collectible;
- Prohibit abuses of the justice system, including failure to give the consumer notice, spreadsheet justice without evidence of the debt, and laundering of timebarred debts with new judgments.
Forced arbitration. Consumers who obtain financial products or services are routinely required to give up their access to justice if the company violates the law. Forced arbitration pushes consumers into a secretive, biased and lawless system before private judges paid by industry. All of the laws in the world do not matter if companies can ignore them with impunity. The CFPB should:
- Exercise its authority to ban forced arbitration clauses in agreements for consumer financial services and products.
Why do we need a CFPA?
For years, consumers have dealt with toxic mortgages, outrageous interest rates, and unreasonable bank fees, all in a largely unregulated market. Federal agencies are responsible for regulating all other consumer products, from toys to toasters to aspirin; it's time that there was an agency completely dedicated to protecting consumers from dangerous financial products.
"We don't say 'buyer beware' when people are buying prescription drugs, or when they're concerned about lead paint in toys, but when Americans purchase financial products... they often have little idea what those products... contain and whether or not they're good for their families."
- Senator Dick Durbin
Currently, the responsibility to protect consumers in the financial marketplace is spread among ten different regulating agencies, none of whom have consumer protection as their main goal. It is abundantly clear that the existing regulators have failed to protect consumers. For proof, look at some of the stories shared on our website.
"Consumer financial products were the front end of the destabilization of the American economic system."
-Professor Elizabeth Warren
Some people have asked why we can't deal with this problem simply by making the present regulatory structure work better. They suggest that this could be done in several ways: by pressuring or shaming the current regulators into doing better (which they are all promising to do), by appointing new regulators who are more committed to consumer protection (which is also happening, as openings arise), and by enacting new laws responding to particular problems (as was recently done for credit cards and is pending in many other areas).
The answer is that there are deep flaws in the basic structure of the current regulatory system that will lead these limited changes, while positive, to fall far short of providing the consumers with the protections that they need and deserve. Even when Congress passes new laws, it is up to the regulators to write the rules that will implement them, and then to enforce the newly written rules.
The basic flaws in the current regulatory structure are these:
Consumer protection responsibilities are divided among ten federal agencies, and between federal and state regulators, in a haphazard and confusing way. No one is really in charge, and some types of lenders, such as payday lenders and mortgage companies not related to banks, have no federal regulator at all.
None of these agencies have consumer protection as their primary mission, and so the interests of consumers are inevitably subordinated to things that the agencies care about more. In the case of the four federal bank regulators, for example, concerns for banks' profitability ("safety and soundness") have resulted in a reluctance to crack down on practices that promote bank profits at the expense of exploited consumers.
Companies can, in effect, choose which agency - if any - will regulate them, by choosing what kind of bank "charter" they will operate under. This leads to great pressures on bank regulators to loosen their regulations. Any regulator who decides to be too tough on its banks will find itself without many banks to regulate, and without the fees the reguated banks pay. The result is a "race to the bottom" in terms of consumer protection standards.
So why do we need a CFPA? Because unless we have a single agency that has consumer protection as its sole mission and that has the authority to write and enforce rules for the whole range of consumer financial products, the basic flaws in the current regulatory system will remain - and effective consumer protection will not be achieved.
Last update: September 2010.
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