By Anita Hamilton
A federal agency charged with protecting consumers from abuses by banks, lenders, and other financial institutions faces an existential threat once Donald Trump starts his second term. Both Tesla CEO Elon Musk and Vivek Ramaswamy, who are heading up the incoming administration's efficiency drive, have said they want to get rid of the Consumer Financial Protection Bureau altogether. "Delete CFPB," Musk posted on X a few weeks ago.
While shutting down the CFPB altogether would be tough, there are ways to greatly reduce its reach, including replacing the current head with one who will slow enforcement efforts, trimming its budget, and hitting the brakes on new hires. That's exactly what happened the last time Trump was in office.
What the CFPB Does
Created after the 2008-09 recession as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress and signed into law by then-President Barack Obama, the CFPB has provided more than $20 billion in monetary relief to consumers to date. Its mandate, as stated in the legislation, is to "regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws."
Most recently, the agency announced that it would distribute $1.8 billion in junk fees collected by credit repair firms back to consumers. It has also challenged misleading student loan practices, helped to lower overdraft fees on bank accounts, and taken on payday and Buy Now Pay Later lenders, such as Affirm and PayPal.
Unlike most federal agencies, which are funded by congressional appropriations, the CFPB gets most of its approximately $700 million annual operating budget from the Federal Reserve, which in turn is self-funded. The funding was set up this way to ensure the agency remained politically independent. Ramaswamy recently called the arrangement " constitutionally dubious," but the Supreme Court upheld the agency's funding structure this past May.
How Trump Could Scale Back the CFPB
The only way to "delete" the bureau outright is through a congressional vote. While the Republicans hold a majority in both houses, their narrow margins make such a move unlikely to succeed.
"While there certainly are some Republicans in Congress who would like to see the CFPB disappear, it's highly unlikely there's enough support to pass a law eliminating the bureau," Ian Katz of Capital Alpha Partners wrote in a research note earlier this month.
What Trump can do is appoint a new director. Previously, the director could only be replaced before the end of their five-year term for misconduct. But the Supreme Court ruled in 2020 that the director could be fired at will. That opens the door for Trump to replace current director Rohit Chopra as soon as he takes office. Chopra hasn't said if he will resign, and the CFPB didn't reply to Barron's request for comment.
A new director, who would need Senate confirmation, could work to slow or halt enforcement actions initiated during the Biden administration. That's what happened during Trump's first term, when he appointed the former South Carolina Rep. Mick Mulvaney as acting director in late 2017.
"When it comes to enforcement, we will focus on quantifiable and unavoidable harm to the consumer," Mulvaney said of his leadership philosophy at the time, adding, "we won't go looking for excuses to bring lawsuits." He also said there would be a greater focus on formal rule making and "less regulation by enforcement."
In addition to requesting a budget of zero dollars, Mulvaney froze hiring and all new regulations for the first 30 days. In early 2018, he withdrew from a lawsuit against payday lenders filed in Kansas by his predecessor Richard Cordray.
After the agency went on to scale back regulation of student loan companies, its lead enforcer, Seth Frotman, resigned. "It has become clear that consumers no longer have a strong, independent Consumer Bureau on their side," he wrote in his resignation letter. (Frotman returned to the agency in 2021 as its General Counsel.) Between 2017 and 2019, the CFPB's head count dropped 14%, while annual enforcement actions fell from 37 to 22.
Mulvaney would soon move on, becoming Trump's acting chief of staff. The CFPB would move on as well, ramping hiring and enforcement back up under Biden. In 2023, it announced more than $3 billion in monetary relief for consumers, up from less than $500 million in 2018, the year Mulvaney left the agency.
Write to Anita Hamilton at anita.hamilton@barrons.com
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December 20, 2024 02:30 ET (07:30 GMT)
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