The U.S. government created the Consumer Financial Protection Bureau (CFPB) in 2010 under the Dodd-Frank Act as part of its response to the 2008 financial crisis. This new executive agency (the brainchild of then-Harvard law professor, now Senator, Elizabeth Warren) is an independent bureau within the Federal Reserve System. It took over various functions previously performed by seven different agencies.
Its purpose is to help consumers avoid and fight back against unfair, deceptive or abusive financial practices. If you’d like to know more about what this agency does and how it’s trying to protect American consumers, read on. (For background on Dodd-Frank, see The Wall Street Reform Act: What You Need to Know.)
Why Create a Consumer Financial Protection Bureau?
According to the CFPB, having so many different agencies handling consumer financial protection before 2008 contributed to the financial crisis. The CFPB is intended to form the basis of a more effective system for creating and enforcing consumer financial protection laws. The bureau also supervises financial service providers, such as mortgage lenders, payday lenders, debt collectors, credit reporting agencies and private student loan companies that the federal government didn’t oversee previously. The hope is that federal oversight of these entities will better protect consumers. The CFPB also oversees large banks, thrifts and credit unions.
How the Bureau Is Organized and Funded
Richard Cordray headed the CFPB from its creation through November 2017. He became the new agency’s leader after a controversial recess appointment by President Obama. The Senate confirmed his position in July 2013. His background was in consumer protection in Ohio, where he served as attorney general and treasurer. He also has a background in law.
In November 2017, Cordray stepped down, and President Trump appointed Mick Mulvaney as acting director of the Consumer Financial Protection Bureau. Mulvaney has also served as director of the federal Office of Management and Budget since February 2017. He also used to run his family’s small businesses.
Below Cordray are 38 leaders and assistant directors who make up part of the agency’s total of 1,623 full-time employees in FY 2016. The agency’s budget was $524.4 million for FY 2015, and will be $605.9 million for FY 2016 and $636.1 million for FY 2017. For FY 2018, its budget is $663 million. The money comes from the Federal Reserve System. To give an idea of how the bureau uses its budget, here’s how it was allocated for FY 2016 among the agency’s four goals:
- $279.4 million (46%) to prevent financial harm to consumers and promote financial benefits for them
- $131.6 million (22%) to financially empower consumers
- $56.3 million (9%) to use data about consumer financial markets and behavior to inform consumers and policymakers
- $138.6 million (23%) to maximize the CFPB’s impact
In June 2018, Mulvaney fired the CFPB’s entire 25-member Consumer Advisory Board. The CFPB says the board will be replaced in the fall and the new board will be smaller. Critics are concerned that the change is part of a larger effort to make the bureau less powerful as a consumer watchdog. Mulvaney has the power to cut the CFPB’s budget and to influence oversight of major financial institutions. He has added to the agency’s mission statement a goal of addressing “outdated, unnecessary, or unduly burdensome regulations.”
What Does the CFPB Do, Exactly?
The CFPB says it “makes sure banks, lenders, and other financial companies treat you fairly.” Its website offers “clear, impartial answers to hundreds of financial questions” and “the information you need to make more informed choices about your money.” The agency also “hold[s] companies accountable for illegal practices” and “listen[s] to consumers and make[s] their voices heard.” It "helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules and by empowering consumers to take more control over their economic lives.”
Its goals are to help inform consumers so they can protect themselves; to keep an eye on financial institutions and enforce the laws they’re required to follow; and to gather and analyze information about financial service providers, financial markets and consumers’ financial behavior. It’s supposed to help consumers make fully informed financial decisions that are in their best interests.
In January 2018, the bureau issued a statement saying that it would seek “constructive feedback” and “ideas for improvement” from the public on its “enforcement, supervision, rulemaking, market monitoring, and education activities” to seek “ways to improve outcomes for both consumers and covered entities.” Mulvaney expressed a desire for “greater consumer choice and efficient markets, while vigorously enforcing consumer financial law in a way that guarantees due process.”
In February 2018, Mulvaney removed the power of the Office of Fair Lending and Equal Opportunity, a unit within the CFPB, to pursue consumer discrimination cases and force companies to pay fines and restitution to harmed consumers. He also requested public feedback on the agency’s enforcement processes.
Prior to that, Mulvaney dropped a lawsuit against payday lenders and an investigation into a subprime lender and said he would reconsider rules the financial industry opposes, including rules regarding payday lenders’ fees. The Trump administration has said that some of the agency’s past actions were too aggressive; the CFPB now seems to be taking a different approach that might be considered more free enterprise.
In April, Mulvaney requested input on the bureau’s process for handling consumer complaints and inquiries.
You can find more details about the agency’s future direction in its Strategic Plan for FY 2018-2022.
Consumer Education Publications
The CFPB produces publications to inform consumers about common and potentially confusing financial issues. For instance, “Pension lump-sum payouts and your retirement security” explains the difference between traditional pension payments, which are distributed monthly for a lifetime, and lump-sum pension payments, which are distributed all at once up front. It tells consumers about the risks of accepting a lump sum and when one option might make more sense than another. It says that if you’re in good health and expect to live a long time, monthly pension payments might be your best bet, whereas if you’re in poor health, a lump-sum payment might make more sense. It talks about which protections are available for your pension under each scenario, what the tax consequences are for each option and how to learn more about your choices.
CFPB publications use plain language that average consumers should be able to understand even if they don’t have any financial expertise.
Handling Consumer Complaints
If you have a serious complaint about a financial product or service, you can report it to the CFPB if you think the government should be aware of the problem or you need help getting it resolved. In fiscal year 2015, the agency handled more than 265,000 complaints. In fiscal year 2017, the agency handled 320,200 consumer complaints. (Read When, Why and How to File a Complaint with the CFPB.)
What does the CFPB do with these complaints? It forwards them to the company you’ve had a problem with and tries to get a response. The company is supposed to report back to the CFPB about the steps it takes regarding your complaint. The agency then publishes basic information about your complaint to its public Consumer Complaint Database. With your permission, it will also publish your description of the complaint. None of your personal information gets published in the database. You can also give the CFPB feedback regarding the company’s response to your complaint. The CFPB uses the complaint data it receives to monitor financial service companies, enforce laws and improve regulations.
When the CFPB finds that a company has violated a consumer financial law, it may require it to pay a civil penalty. The money it collects goes to compensate victimized consumers and to further the agency’s consumer education activities. In FY 2016, funds from civil penalties added another $324.5 million to the agency’s $605.9 million budget.
The agency also keeps an eye out for financial discrimination and new financial risks.
Major Accomplishments and Projects
You might have come across some of the CFPB’s work when dealing with a financial product or service.
- The “Know Before You Owe” information that lenders must give you when you apply for a mortgage, student loan or credit card was carefully designed by the CFPB to be easy to understand and to give consumers key facts about a loan’s costs, risks and benefits before they make a borrowing decision.
- The CFPB went after the nation’s largest nonbank mortgage servicer, Ocwen Financial Corp., after it learned it was defrauding consumers. It made Ocwen give financial relief to underwater and foreclosed borrowers it had harmed. The CFPB also tightened mortgage-lending standards for all lenders to try to prevent lenders from giving homebuyers loans they can’t afford. These new standards are implemented under the ability to repay rule.
Recently, the CFPB has been working to protect consumers on payday loans and checking accounts, while also expanding its reach on auto loans.
- In February, the CFPB was finalizing new rules restricting high-interest payday lending while asking banks and credit unions to make low-cost, small-dollar loans more accessible to consumers. Payday loans can have APRs as high as almost 400%, according to the agency. Some of these loans can be rolled over or offer interest-only payments, trapping consumers in a cycle of debt.
- Also in February, the agency contacted the 25 largest retail banks about improving consumer access to checking accounts, increasing consumers’ ability to avoid overdrafts and avoiding inaccurate credit reporting as it pertains to checking accounts. The goal is to make it easier for consumers to open a low-risk checking account and harder for them to incur overdraft fees. The CFPB is also trying to make sure consumers aren’t unfairly denied a checking account because of inaccuracies in their checking account credit reports. In addition, the agency is producing new materials to educate consumers about how to help themselves on these issues.
- In 2016, the CFPB reached an agreement with Toyota Motor Credit, the country’s fifth largest auto lender, requiring the company to refund up to $21.9 billion to African American and Asian/Pacific Islander borrowers who paid higher rates on vehicle loans. (These higher rates were considered discriminatory because they weren’t based on the borrowers’ creditworthiness. The CFPB found that the company had overcharged African Americans by an average of $200 and Asian/Pacific Islanders by an average of $100. Going forward, the CFPB required the company to change its lending policies to make sure its customers have fair and equal access to credit. The CFPB has taken similar actions against Ally Financial Inc., Ally Bank, American Honda Finance Corp. and Fifth Third Bank.
- In 2017, the CFPB ordered Mastercard and UniRush to pay $10 million in restitution to economically vulnerable customers who were cut off from access to their funds on a reloadable prepaid debit card called RushCard in October 2015 due to “preventable failures.” Customers couldn’t receive direct deposits, pay bills or withdraw cash, among other problems. The agency also levied a $3 million fine.
- In 2018, the CFPB reached a settlement with Wells Fargo for violating the Consumer Financial Protection Act in its administration of a mandatory insurance program for its auto loans and its charging of certain borrowers for mortgage interest rate-lock extensions. The agency fined Wells Fargo $1 billion and is requiring it to remediate harmed consumers.
(For related reading, see Why the Feds Sued the Biggest Student Loan Lender.)
The Bottom Line
Depending on where your politics lie, you might think the CFPB is indispensable, excessive or somewhere in between. Supporters argue that without it, consumers would face more financial problems due to unethical or illegal practices in banking, mortgages, credit cards and lending. Opponents say it limits consumer choice, thinks it knows better than consumers what is best for them, and has too little oversight and too much power. Now that you know more about why the agency was created and what it does, you can form your own opinion.
For further reading on some of the issues CFPB addresses, see The Best Alternatives to Payday Loans, How to Avoid Being the Victim of Auto Loan Ripoffs and How Overdraft Fees Work & How to Avoid Them.