Keep the CFPB, but install some commonsense leadership at the top

Frank Gargano

What do the world's most powerful person, the world's richest person and the banking industry's most hated former regulator have in common?

All these men, Donald Trump, Elon Musk and Rohit Chopra, are graduates of The Wharton School.

Full disclosure: Although I taught at Wharton for over 40 years, none of them were my students.

Trump and Musk decided that Chopra, who led the Consumer Financial Protection Bureau during Joe Biden's presidency,  should go, something they probably would not have done if Chopra ran the CFPB with common sense.

A CFPB getting working orders from activist congressional leaders and vocal community groups is no better than a CFPB run by a pro-industry, chainsaw-wielding efficiency expert.

Both may succeed with their personal goals, but will ultimately fail the agency's public policy goal of protecting consumer finances.

In either case, the leader must go, not the agency. A biased ref can be booted, but the game must go on.

No one should know this better than Wharton grads, since the goal of the school's founder, Joseph Wharton, was to provide practical knowledge for graduates to become "pillars of the State, whether in private or in public life." Trump and now even Musk, in his role leading the Department of Government Efficiency, have experience in both the private and public sectors. Chopra has meaningful experience only in the latter.

Wharton is part of the University of Pennsylvania, whose founder, Ben Franklin, emphasized: "Common sense is something that everyone needs, few have, and none think they lack."

Basketball coaches "can't teach height," and Franklin likewise understood that universities can't teach common sense: "Common sense without education is better than education without common sense."

I don't believe Chopra ran the CFPB with common sense for at least five reasons, which follow from his bureaucratic background and the agency's defective genetic structure.

First, instead of an independent consumer-focused agency, Chopra and his CFPB were viewed by the industry as a "woke" regulator with a limitless Federal Reserve credit card, marching to the orders of pro-regulation consumer crusaders.

This defect is traced to the CFPB's establishment after the financial crisis of 2007-2008. The agency was championed by Sen. Elizabeth Warren, a law professor at the time, who never met a bank regulation she didn't like. Whenever a regulatory agency with an effectively unlimited budget is politicized, especially in a 50-50 polarized country, there won't be universal acceptance for anything it or its leader does.

Instead of being an anti-industry cheerleader in front of friendly community groups, Chopra should have attended more industry conferences to gain a better understanding of regulatory, competitive and shareholder demands. Government leaders acting in the public interest must not regulate through politically colored glasses.

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Second, Chopra and his CFPB demonized all big financial institutions instead of trying to work with or motivate them to be more pro-consumer. This "Big Bank Derangement Syndrome" stems from the misguided view, in the wake of the financial crisis, that large banks are "too big to fail," and care only about rewarding shareholders and officers.

Willie Sutton robbed banks because "that's where the money is." But that's the same reason why practically minded regulators should work with banks, not against them, to encourage consumer-friendly behavior.

Why not target big banks with the highest overdraft fees instead of forcing the industry into a one price fits all solution? Going after so-called "junk fees" by fire-hosing the entire industry to put out a few anti-consumer banking fires results in junk regulations and costly court battles.

Common sense dictates both the carrot and the stick. Why not publicly praise banks with minimal or no overdraft fees? Why didn't Chopra commend Chase's bold plan to open 100 branches in "banking deserts?" The CFPB's website has regular press releases criticizing banks, but why not praise the 10% with outstanding CRA ratings each month? Bureaucrats love wielding the big stick, but common-sense ones, especially those with business experience, use carrots to motivate good behavior.

Third, Chopra tried to be a jack-of-all-bank-regulatory-trades instead of a master of one: consumer finance. This problem was the result of another overreaction to the financial crisis, which led Congress to place the CFPB director on both the FDIC board and the Financial Stability Oversight Council.

He regularly commented on important banking issues unrelated to consumer finance protection, like executive compensation, index funds, living wills, IT outages and worker surveillance. Besides further angering the industry by driving his CFPB 18-wheeler out of his consumer finance lane, he misallocated government resources away from the agency's primary mission.

Fourth, the CFPB's targeted supervisory authority for banks and credit unions with over $10 billion in assets caused Chopra and his lone wolf agency to be disliked even by other regulators, whose supervisory power the CFPB usurped.

Like all bureaucrats, regulators hate conceding power or budget, and they lost both with the CFPB's creation. This was a double whammy for the Fed, since it had to house and finance the CFPB, like a rich daddy bankrolling his entitled trust fund kid.

Allowing the CFPB to enforce 19 consumer protection regulations with its own rule-writing authority and 924-page examination manual suggested existing agencies were either unwilling or unable to do their jobs. The industry's fear of $10 billion is real. The heightened supervision crossing that threshold directly impacts only a small fraction of the roughly 10,000 U.S. depository institutions. However, those institutions control over 80% of industry assets.

Fifth, Chopra should have spent more time using business-savvy cost/benefit analyses to regulate nontraditional players like fintechs, crypto and other new firms trying to get into the industry instead of zealously overregulating traditional banks competing with them. The subprime lenders of the financial crisis taught us that consumers need their finances protected from the financial barbarians at the industry's gate more than they do from existing players.

Post-grad Wharton memo to Musk and Trump: We need the CFPB, but only under two conditions.

First, all consumer financial protection regulatory, supervisory and rule-making powers for all financial institutions, including the current CRA expanded to credit unions, should be consolidated into a truly independent CFPB to increase DOGE-mandated efficiency and decrease regulatory compliance shopping.

Second, the CFPB must be run by a truly independent, dedicated and commonsensical person without other directorships, a job description unfortunately inconsistent with the most recent CFPB leader but hopefully with the next one.