Dodd-Frank's Legacy Depends on CFPB Flexing Its Muscles

Last month's five-year anniversary of the Dodd-Frank financial reform law has prompted much reflection on issues such as the behavior of Wall Street and how much risk remains in our financial markets. Last week saw two Capitol Hill hearings on those subjects. But we should also remember that the law was intended to make the consumer financial products people use every day safer and more transparent.

One of the Dodd-Frank Act's key provisions was the creation of the U.S. Consumer Financial Protection Bureau. After getting past a lengthy and sometimes contentious startup period, the agency has acted to fix the mortgage lending problems that fueled the financial crisis. Can the CFPB effectively move beyond areas where it was specifically instructed to take action — such as making home mortgages safer — and exercise broader regulatory authority granted to it by Congress to improve the marketplace for products and services like prepaid cards, overdraft policies, and payday loans? The bureau's long-term reputation — and perhaps the overall success of Dodd-Frank — may well be judged on whether the answer is "yes."

Before the passage of Dodd-Frank, protection for consumers who take out a mortgage or student loan, obtain a credit card, open a bank account, transfer money or use a wide variety of other financial services was divided among seven federal agencies — all of which had other primary responsibilities. The CFPB was created to replace this fractured and often ineffective oversight with consistency and uniformity, providing benefits to Americans who use financial services as well as the companies that serve them. The agency's mission is not only to enable consumers to count on similar protections for similar products and services, regardless of the type of company providing them, but also to allow financial services institutions to operate on a level playing field in which no company can gain advantage by exploiting regulatory gaps.

In its first four years, the CFPB has devised mortgage rules that place a greater onus on lenders to ensure that borrowers have the capacity to repay their loans. The bureau has also begun to enforce a wide range of federal consumer protection laws that existed before its creation and to supervise large banks and credit unions and some nonbank companies (such as payday lenders, credit reporting agencies, and debt collectors). Additionally, the CFPB has set up a comprehensive process to solicit, analyze, and resolve consumer complaints.

Last year, for example, the agency proposed strong new safeguards and disclosures for general purpose reloadable prepaid cards, a product that a growing number of consumers are embracing, particularly the millions of Americans without a traditional bank account. New research from The Pew Charitable Trusts shows that usage of these cards jumped more than 50 percent from 2012 to 2014.

Later this year or early next, the CFPB is likely to propose new rules for checking account overdraft practices. Many observers anticipate that these rules will rein in transaction reordering, a tactic some financial institutions use to maximize overdraft fees by processing a customer's largest transactions first instead of following the order in which the transactions occurred.

This measure is a good start, but the CFPB also needs to address other high checking account overdraft costs. The median overdraft fee is about $35 for a $24 transaction, and the consumer typically pays it in three days, according to data from the bureau and my organization's research. By the bureau's estimate, that charge is tantamount to a loan with an annual percentage rate of more than 17,000%. Overdraft fees need to more closely align with the actual cost of providing the service.

To further protect the financial health of families, new rules are also in the pipeline for payday and other high-cost, small-dollar loans. Earlier this year, the CFPB proposed a regulatory framework that would tackle the problem of these unaffordable small-dollar loan payments while preserving access to credit. A Pew poll released last week shows Americans strongly favor such reforms.

But there is still room for improvement. For example, stronger limits on the term of a loan are needed to prevent payments from rising over time to excessive levels. A two-week loan with a one-time fee can take the average borrower — typically with a damaged credit history and living paycheck-to-paycheck — about half the year to repay. By then, the fees will have far outstripped the original loan amount.

Richard Cordray, the CFPB's director, has said that his agency will seek to balance its "dual responsibility" of stopping unfair, deceptive, and abusive practices while ensuring that consumers have access to beneficial financial services. As the Dodd-Frank Act reaches the five-year mark, this important — and defining — goal is a key benchmark by which the act's success will be judged.

Travis Plunkett is senior director of the family economic stability project at The Pew Charitable Trusts.