The U.S. Supreme Court recently heard oral arguments on the constitutionality of the Consumer Financial Protection Bureau's unusual funding mechanism.
The CFPB is the federal agency responsible for ensuring that markets for consumer financial products are fair. It was established by the Dodd-Frank Act when I was working for former Rep. Barney Frank.
As someone who has been guided by liberal principles throughout my life, chief among them being the notion that government must protect consumers, I strongly support this mission. And the CFPB is well on its way to advancing it, as evidenced by the 10,000 complaints it handles each week.
However, the arguments also revealed the CFPB has become deeply flawed. These flaws hurt the CFPB's license to operate, vulnerable consumers and our democracy. They must be fixed if the CFPB is to continue playing its critical role.
The first main flaw lies in its design.
When creating the CFPB, we wanted it to be insulated from political interference. But we were concerned such a structure could lead to the subversion of the legislative process and inadequate accountability without Congress.
The evidence is now in. Our fears about its structure — its ability to act as judge, jury and executioner — have been realized. The bureau's unchecked power has allowed it to opaquely overregulate the industry outside of the rulemaking process, and to do so without an understanding of how its actions may hurt consumers by, for example, blocking needed access to credit and limiting consumer choice. This is the antithesis of liberalism and democratic values.
The solution: Make the CFPB subject to congressional appropriations. Doing so would allow democratically elected representatives to scrutinize the agency's actions and reflect the will of the people.
The increase in accountability would help dispel citizens' skepticism toward government as well. The more we can show that government answers to the people, the more we can trust each other and solve problems together. The increase would also improve the public's understanding of the CFPB by fostering healthy public dialogue about the agency.
The CFPB's second core flaw: It lacks a reliable way to determine how it will enforce its rules. This makes compliance nearly impossible because businesses don't know how the agency will interpret these rules. The uncertainty causes frequent lawsuits or "regulation by enforcement," hurting helpless consumers the most.
By requiring the CFPB to articulate and substantiate the consumer injury it seeks to remedy in connection with its actions, the CFPB may help businesses to better serve customers while adhering to consumer protection standards. The framework should be based on objective and quantifiable criteria. The CFPB's analysis should reflect a keen understanding of the industry it is regulating and the consumers it seeks to protect.
The Federal Reserve Board and state regulators signed off on the $1 billion deal, paving the way for a late 2023 closing. The approvals were significant given that other large combinations have run into trouble.
The CFPB's recent lawsuit against Credit Acceptance, which the judge paused last month until the Supreme Court determines the constitutionality of the CFPB's funding mechanism, exemplifies both flaws. It is one of many examples of how our fears about the CFPB's lack of congressional oversight have been realized.
For background, Michigan-based Credit Acceptance is an indirect auto financing company that makes it possible for any American to buy a car.
These types of offerings are critical to our economy and broader society. Approximately half of Americans have below-prime credit or no credit score. At the same time, nearly all of them need a car to complete essential activities (like driving to jobs or taking children to school) but frequently have no other way to finance their cars.
The CFPB's lawsuit alleges the "true cost" of a vehicle sold using the company's financing is not the agreed-to price between dealer and customer. Rather, the CFPB claims it is the amount Credit Acceptance subsequently pays the dealer for the finance agreement in the secondary market.
If cognizable and proven, the allegation would be catastrophic for consumer finance. For example, the CFPB is placing an obligation on a dealer (a primary market participant) to know at the time of origination exactly how much a finance agreement will sell for in the secondary market, so the (yet unknowable) delta can be reflected as a finance charge in the finance agreement. This seems impossible, and is likely why the law has never been interpreted in this manner. This legal theory would also require both participants to violate the Truth in Lending Act, which the CFPB itself enforces for auto finance companies.
Additionally, the complaint implies an auto dealer must determine a borrower's ability to repay on a finance agreement. A new "ability to repay" standard is not something the CFPB can create through an enforcement action.
If the CFPB believes it has this authority, it should initiate a formal rulemaking process to develop the standard, complete with a cost-benefit analysis to understand the actual impact on consumers and businesses. Without that, the CFPB's attempt to create the standard via litigation is quintessential "regulation by enforcement" and may harm the very consumers it seeks to protect.
These facets of the CFPB's case show the practical consequences of its lack of accountability: a misguided lawsuit; lack of knowledge of the auto loan industry and consumer needs; and no clear consumer injury, with the potential for hurting vulnerable consumers if it is successful (by forcing Credit Acceptance to only serve Americans with better credit scores).
This does not need to be the case. By subjecting the CFPB to congressional oversight, democratically elected officials could force the CFPB to listen to the people and establish a consistent method of determining injury. The CFPB would then be forced to have a better understanding of the industries it regulates, making consumer protection measures and our democracy stronger and more credible.
The onus is on all of us, across political persuasions, to reform the CFPB so it can do just that.
