Consumer Financial Protection Bureau: Limiting Americans’ Credit Choices

Report Government Regulation

Consumer Financial Protection Bureau: Limiting Americans’ Credit Choices

April 28, 2016 24 min read Download Report
Diane Katz
Diane Katz
Former Senior Research Fellow in Regulatory Policy
Diane Katz was a research fellow in regulatory policy at The Heritage Foundation.

The Consumer Financial Protection Bureau (CFPB) was established under Title X of Dodd–Frank to “regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws.”[1] Prior to its creation, authority for some 50 rules and orders stemming from 18 consumer-protection statutes[2] was divided among seven agencies.[3] But more than simply consolidating regulatory authority, Congress granted the new agency unparalleled rulemaking, supervisory, and enforcement powers over virtually every consumer financial product and service. As currently structured, the CFPB unduly restricts access to credit without oversight from Congress or the executive branch.

This result is not the unintended consequence of a misguided bureaucracy. It is the calculated result of a departure from the principles that governed consumer protection law for decades.[4] By design, the CFPB is limiting the availability of credit,[5] and curtailing Americans’ choices for investment and wealth creation.

Until passage of the Dodd–Frank Act in 2010, most consumer protection law was designed to equip consumers with the information necessary to act on their preferences, given market conditions, and to punish fraud and other wrongdoing. The role of government, at least theoretically, was to facilitate choice and competition—an approach reflecting the belief that free enterprise, albeit imperfect, yields greater benefit than autocratic alternatives.

That deference to consumer autonomy has now been supplanted by a regulatory framework that treats consumers as fundamentally irrational and prone to act against their self-interest. In the words of Oren Bar-Gil and Elizabeth Warren, the academic architects of the bureau, consumers suffer “cognitive limitations” and their “learning is imperfect.”[6 ]Indeed, the bureau takes the position that “too much information” can “detract from consumers’ decision-making processes.”[7] Under this paternalist paradigm,[8] regulatory intervention is necessary to protect consumers from themselves by limiting complex credit options and standardizing “qualified” loans.

This approach is, of course, inherently contradictory. If consumers suffer cognitive limitations with respect to financial matters, would the politicians and bureaucrats who dictate the terms and conditions of credit not be afflicted by biases of their own, most notably political and institutional incentives? As noted by economist Edward Glaeser, “Human beings surely make mistakes about their own welfare, but the welfare losses created by these errors are surely second order relative to the welfare losses created by governments which not only make errors, but also pursue objectives far from welfare maximization.”[9] Indeed, the bureau’s very existence is rooted in the lapses of seven other regulatory behemoths that were supposed to protect the nation from financial calamity.

In just four years, the bureau has restructured the mortgage market by broadening lenders’ fiduciary responsibilities and standardizing home loans. (CFPB officials also claim to have “streamlined” the mortgage process, although the new rules encompass a whopping 1,888 pages.) There are new restrictions on credit cards, ATM services, auto lending and leasing, electronic funds transfers, and student loans. More rules are in the pipeline for credit reporting, overdraft coverage, arbitration, debt collection, and general-purpose reloadable cards.

The CFPB is also amassing the largest government database of consumer data ever compiled to monitor virtually every credit card transaction.[10] And, it is aggressively soliciting unverified complaints from consumers with which to impugn the reputations of lenders and creditors.[11]

Prior to the 2008 financial crisis, there certainly was a need to modernize the federal consumer protection regime. But a lack of consumer protection was not a major factor in the 2008 financial crisis.[12] Now, however, the structural flaws of the CFPB are contributing to a different crisis: an ever-expanding administrative state that is suffocating free enterprise and individual liberty.

The Beginnings

As with much of Dodd–Frank, Congress created the CFPB without a thorough understanding of the housing market collapse, the subsequent failure of major financial firms, or the resulting shock to the economy. However, the crisis provided an opportunity for the Obama Administration and Democrats in Congress to fulfill a regulatory wish list consistent with the Progressive agenda.

The bureau was designed to evade the checks and balances that apply to most other regulatory agencies. Although established within the Federal Reserve System, the bureau operates independently, with virtually no oversight. CFPB funding is set by law at a fixed percentage of the Federal Reserve’s operating budget.[13] This budget independence limits congressional oversight of the agency, and its status within the Fed also precludes presidential oversight. Even the Federal Reserve is statutorily prohibited from “intervening” in bureau affairs.

Bureau proponents deny any lack of accountability, claiming that the CFPB can be overruled by the Financial Stability Oversight Council (FSOC), which is composed of representatives from eight other financial regulatory agencies.[14] However, the council’s oversight authority is narrow, confined by statute to cases in which CFPB actions would endanger the “safety and soundness of the United States banking system or the stability of the financial system of the United States.” Any veto of bureau action requires the approval of two-thirds of the FSOC’s 10-member board.

The CFPB became operational on July 21, 2011, but was limited by statute to enforcing existing rules for banks and credit unions (with more than $10 billion in assets) until a director was confirmed by the Senate. To launch the bureau, President Obama appointed Elizabeth Warren as a “special advisor.”[15]

The President subsequently dispensed with the confirmation process required by statute and appointed former Ohio attorney general Richard Cordray as CFPB director, claiming the action was a “recess appointment”—though the Senate was not in recess.[16]

Ultimately, the U.S. Supreme Court invalidated three other appointments of the same type,[17] which cast doubt on the validity of bureau actions under Cordray’s (unconfirmed) tenure. Upon his subsequent confirmation, however, Cordray reaffirmed his earlier actions to thwart a legal challenge.

Once Cordray was confirmed, the bureau commenced its supervision of so-called nonbank firms as called for under Title X, including mortgage originators, brokers, and servicers, as well as payday lenders and private education loans. The bureau also has authority to designate additional “larger participants” in nonbank services, which currently include debt collection, credit reporting, auto lending, international money transfer, and student loan servicing.[18]

Reflecting the overly broad nature of its powers, the agency may also supervise any nonbank firm that it deems as posing a “risk” to consumers or engaging in “unfair, deceptive, or abusive” practices.[19] While the terms “unfair” and “deceptive” have been defined in other regulatory contexts,[20] the term “abusive,” has not been defined in law and thus grants the CFPB inordinate discretion.

The bureau’s estimation of risk largely determines whether a financial firm is subjected to ongoing “supervision.” Supervision is no small matter.[21] The bureau may require a firm to divulge reams of documents and records, and submit to ongoing scrutiny of its entire framework of policies and practices. Bureau procedures also call for background checks of company officers, directors, and other key personnel. Bonding requirements may be imposed.

Prior to Dodd–Frank, nonbank financial services did not exist in a regulatory vacuum. For example, consumers had recourse under the Federal Truth in Lending Act and the Real Estate Settlement Procedures Act, while many states and municipalities regulated (or prohibited) a variety of nonbank financial services. Federalizing nonbank regulation eliminates regulatory competition which, in turn, undermines market competition.

The Precautionary Principle

Despite the magnitude of powers granted to the bureau to deter risk, there is no description in Title X of what constitutes risk.

According to the bureau’s 924-page Supervision and Examination Manual, “Risk to consumers is the potential for consumers to suffer economic loss or other legally cognizable injury (e.g., invasion of privacy) from a violation of Federal consumer financial law.”[22] Bureau staff is directed to gauge this risk potential based on “the nature and structure of the products offered, the consumer segments to which such products are offered, the methods of selling the products, and methods of managing the delivery of the products or services and the ongoing relationship with the consumer.” In other words, the bureau acts upon a supposition of future harm rather than actual violation of law.

Examiners are also expected to determine the likelihood that a supervised entity will not comply with federal consumer financial law in the future, and forecast whether risk will decrease, increase, or remain unchanged—a magical ability that every investor would undoubtedly covet. This subjective calculation of risk means that firms are being regulated based on ever-shifting criteria. Companies may be penalized for conduct that they had no reason to believe was improper. Such a system does not comport with constitutional tenets of due process.

All financial products and services involve risk—to consumers and creditors alike. Prior to Dodd–Frank, consumers could comparison shop, seek recommendations from friends and family, or employ experts on their behalf to weigh drawbacks and benefits. For their part, firms traditionally account for risk with pricing. Under Dodd–Frank, the CFPB determines what degree of risk is lawful—at the same time that the bureau’s actions distort market signals that would otherwise signal risk.

Regulatory “Abuse”

The bureau’s authority to protect consumers from “abusive” practices is likewise vaguely defined. Title X of Dodd–Frank characterizes as abusive any action that:

  1. Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  2. Takes unreasonable advantage of:
    • a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
    • the inability of the consumer to protect his interests in selecting or using a consumer financial product or service; or
    • the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

How can the CFPB determine consumer “ability” or the requisite degree of consumer “understanding” for an exceedingly diverse population? In effect, the bureau is regulating the finance sector based on a notional assessment of consumers’ aptitude and their presumed inability to make rational decisions about their personal finances.

The agency has issued neither guidance nor rules to define abusive practices, nor have officials shown much willingness to provide clarity—even when asked explicitly to do so by Congress.[23] During a 2012 hearing of the House Financial Services Committee, for example, when asked by lawmakers to define “abusive,” Cordray said, “We’ve been trying to puzzle through…exactly how that…term…should be applied in the facts and circumstances of individual situations.”

In other words, bureau regulators do not quite know what it means, but they will know it when they see it. Covered institutions evidently are supposed to glean from enforcement actions what the bureau considers to be abusive at any point in time.


The bureau has launched dozens of investigations and issued multiple subpoenas demanding customer data, testimony from executives, and piles of internal policy documents. The CFPB is not required to possess evidence of wrongdoing before initiating a probe. Bureau officials launch an investigation by issuing a Civil Investigative Demand (CID), which is a form of subpoena.[24]

The target of a CID has only 10 days to confer with bureau staff if he intends to seek modification of a subpoena. As noted by the law firm of Venable LLP, that is hardly sufficient time to assemble a legal team, evaluate the CID, consult with relevant IT and business personnel, and craft a response.[25]

CID targets may have counsel present for on-the-record testimony before the bureau, but the opportunity for counsel to make objections is limited.[26] A petition to modify or set aside any of the investigative demands must be submitted within 20 days of receiving the CID. CFPB officials are allowed to confer in secret. The decision on a petition to modify a CID rests solely with the director, and the rules contain no provision for judicial appeal of this decision.[27] A firm’s only alternative is to refuse to abide by the CID and raise objections before a judge—after the bureau seeks a court order to enforce its demands.


The CFPB is authorized to obtain “any appropriate legal or equitable relief” for violations of federal consumer financial laws. The bureau has been particularly aggressive in obtaining financial “relief” for consumers, with $5.8 billion in orders announced to date.

As called for by statute, the bureau has established a Civil Penalty Fund into which enforcement penalties are deposited and payments to victims are made. Of the $342 million in civil penalties collected between 2012 and 2015, just $190 million (55 percent) has been used to compensate victims.[28] Another $13 million has been used for “consumer education and financial literacy” when victims could not be located or payments were “otherwise not practicable.”[29]

The Drive for Data

CFPB officials tout the bureau as a “data-driven agency.”[30] They emphasize that bureau policies and priorities are based on research and analyses of financial products and services, with particular emphasis on discerning “risk to consumers.”

Measuring various aspects of a market may be beneficial, of course. But not all data collection leads to credible conclusions. Nor does data, in and of itself, determine sound policy. Consider the bureau’s use of complaint data, which officials identify as the “start and end” of the bureau’s rulemaking and enforcement, and which Cordray has called the CFPB’s “lifeline.”[31] For all the consequential uses to which the data are put, however, none of it is verified.[32]

According to the CFPB, it solicits consumer complaints to gain a better understanding of what is occurring in the financial marketplace, and to “help” the market work more efficiently. Staff have been instructed to regard complaint data as “indications of potential regulatory violations, including unfair, deceptive, or abusive acts or practices.”[33] The complaint database is also intended to inform consumers about financial products and services.

The CFPB initiated its complaint portal for credit cards in July 2011,[34] and launched the public Consumer Complaint Database in June 2012.[35] Mortgage complaints were subsequently added, followed by complaints about checking accounts, savings accounts, CDs, and student loans. Most recently, the database was expanded to include payday loans and prepaid cards, other consumer loans, and other financial services. The CFPB issued a final policy statement in March 2015 to expand the Consumer Complaint Database to include consumer narratives.

The bureau does not verify the complaint allegations; it only takes steps to confirm whether there exists a commercial relationship between the consumer and the company in question.[36] Each complaint is catalogued on the agency’s website, including the name of the accused, the nature of the alleged offense, the date of the complaint, and the zip code of the complainant (whose identity is not revealed). In addition to providing public access to this raw data, the bureau reports the complaints to various federal and state regulatory agencies, and also issues periodic reports about “trends.”

There is also no way to determine whether a complaint relates to dissatisfaction with or misunderstanding of legitimate terms of service—as opposed to actual wrongdoing. The system relies on individuals to categorize their complaints, but the limited number of broad categories invites mischaracterization. Nor is there any way to distinguish whether a complaint is made because a company failed to offer an adequate remedy to the customer, or if the customer simply rejected a reasonable response.

The CFPB’s Legal Division concluded that federal Information Quality Guidelines do not apply to the Consumer Complaint Database because the published complaint data do not meet the definition of disseminated “information.” The Legal Division also has noted that the CFPB’s disclaimer about the lack of verification sufficiently counters any appearance that the Consumer Complaint Database represents the agency’s views.[37] CFPB officials have stated that the unverified complaints have value to the public and that “the marketplace of ideas will determine what the data show.”[38]

The database also lacks statistical validity. Self-reporting does not ensure that the complaints represent the experiences of the population as a whole. Consequently, any of the policies derived from the data are not applicable to the general population. The complaint data also lacks context. The bureau reports the total number of complaints by type, but gives no indication of the size of the market. For example, a total of 14,000 credit card complaints were submitted to the bureau in 2014, but there were 550 million credit cards in circulation that year—among just Visa, MasterCard, and American Express.[39] Thus, the complaints represent only 0.0025 percent of credit card holders.

Such a system exposes financial firms to unwarranted reputational harm and lawsuits. The aggregation of unverified complaints by zip code also may expose firms to claims of lending discrimination or “disparate impact”—which CFPB officials have aggressively pursued. Congress authorized creation of a complaint database, but set no data quality standards. Lawmakers may have mistakenly assumed that the CFPB would manage the data in a more responsible manner.

Home Mortgage Disclosure Act

Although already in possession of a massive amount of consumer financial data, the CFPB recently increased data collection requirements for lenders under the Home Mortgage Disclosure Act (HMDA). Dodd–Frank mandated some new data collection, but the bureau has vastly exceeded those provisions with its new 797-page rule.[40] Instead of just nine data fields, lenders will have to report 45 separate data points about mortgage applicants, borrowers, and the underwriting process; the property that is securing the loan; features of the loan; and other unique identifiers.[41]

The HMDA was originally approved by Congress in 1975 for monitoring geographic lending patterns. The HMDA was followed by passage of the Community Reinvestment Act (CRA), which was intended to track mortgage lending to reduce discriminatory credit practices in low-income neighborhoods.[42] Compliance with the CRA was necessary for banks to be approved for new branches, mergers and acquisitions, and other bank actions.[43]

The CFPB already has acquired consumer financial information on 173 million mortgages from an outside data aggregator.[44] The new HMDA requirements provide the bureau with far more information than is necessary to monitor mortgage trends. For example, the agency is requiring that lenders report on the age of applicants and borrowers, their debt-to-income ratios, credit scores, and a host of other financial information unrelated to home loans.

Dodd–Frank explicitly prohibits the bureau from collecting personally identifiable information. But so vast is the HMDA data set that homeowners’ privacy is at considerable risk. Nor is the data secure. A 2014 study by the Government Accountability Office found that “additional efforts are needed in several areas to reduce the risk of improper collection, use, or release of consumer financial data.”[45]

Disparate Impact

The bureau places considerable emphasis on enforcement actions against discriminatory lending. The bureau’s determination of discriminatory lending involves analysis of “disparate impact,” a widely disputed doctrine by which a creditor’s practice may be considered unlawful if it results in a discriminatory effect—even if the creditor has no intention to discriminate and the practice appears neutral on its face.[46 ]The supposed discriminatory effect applies to race, color, national origin, religion, sex, or familial status.

A finding of discriminatory effect requires documentation of a disparate outcome. Demographic data is available for some financial products and services, such as mortgages under the HMDA. However, there is a dearth of such data for a variety of other financing, so the bureau has resorted to proxies instead.

The bureau’s method has involved constructing a probability of consumers’ race and ethnicity based on their surname and their place of residence. However, this “methodology”[47] amounts to little more than guessing, which has been admitted by agency officials.[48] Nonetheless, they cited their deeply flawed findings as justification for enforcement actions against car dealers for (supposedly) racist auto-loan practices. Although Title X specifically prohibits the CFPB from regulating auto dealers, the bureau is effectively doing so by constraining the ability of dealerships to set the terms of auto loans.[49] And, the elimination of flexible discounts to buyers will hurt the consumers that the CFPB was tasked to protect.

The ultimate irony is that the bureau itself is guilty of the very actions it is empowered to punish. Employee performance reviews have shown a pattern of white employees ranking distinctly better than minorities. Overall, whites were twice as likely to receive the agency’s top grade as African American or Hispanic employees.

Rob Cauldwell, president of National Treasury Employees Union Chapter 335, which represents CFPB workers, told Congress last year that the agency is “a cesspool of poor behavior, discrimination and retaliation.”[50] The bureau had the most Equal Employment Opportunity complaints of any federal regulator in the year, he said. Bureau officials have announced that a new performance review system will focus “primarily on employee growth and development, with less emphasis on numerical ratings.”[51]


The bureau’s authority to prescribe regulation is vast. (Title X even instructs the judiciary to grant ultimate deference to the CFPB in the event of territorial squabbles over financial regulations among various regulatory agencies.[52]) At the time of publication of this Backgrounder, the CFPB has issued 117 final rules. Following are descriptions of some of the bureau’s most significant regulations.

Mortgage Restructuring. Mortgage “simplification” is one of the 400-plus regulatory requirements called for in the 2,300-page Dodd–Frank Act. The regulatory approach taken by the bureau illustrates both the theoretical shift of consumer protection as well as the unparalleled powers granted the CFPB.

The Dodd–Frank Act requires the bureau to devise an “integrated” form to disclose the terms of a mortgage application (the Loan Estimate) and mortgage closing (the Closing Disclosure).[53] To that end, the CFPB has devised a more “consumer friendly” mortgage process.[54] The previous loan form had been five pages long; the new one is three pages. The closing form remains at five pages. But the agency’s requirements to implement the new forms and related rules run 1,888 pages.[55]

The new forms entail major changes to lenders’ operations, including revising forms, IT systems, and policies. The CFPB estimates the costs of new software and employee training to be $100 million.[56] The pending reform ranks as lenders’ greatest compliance concern, with 48 percent citing it as a “high” concern and an additional 33 percent citing it as a “medium” concern, according to the annual survey by QuestSoft, a regulatory consultancy.[57]

Redesigning the mortgage documents apparently required the assistance of Kleimann Communication Group, Inc., a self-described “small, agile, woman-owned” business, at a cost to taxpayers of nearly $900,000. The Kleimann Group performed “qualitative testing” of various loan formats with 92 consumers and 22 lenders in Baltimore; Los Angeles; Chicago; Albuquerque; Des Moines; Philadelphia; Austin, Texas; Springfield, Massachusetts; and Birmingham, Alabama.[58]

According to the bureau, both forms have been designed to “reduce cognitive burden.” The 533-page chronicle of the bureau’s feat— “Know Before You Owe: Evolution of the Integrated TILA–RESPA Disclosures”—includes insights such as, “We found the most effective way to reduce confusion surrounding the APR [annual percentage rate] was to clarify that it was not the interest rate by adding the simple statement: ‘This is not your interest rate.’”[59]

The new regulations also prohibit balloon payments, that is, smaller mortgage payments every month, followed by a single, one-time payoff at the end of the loan. Late fees also are capped, which will likely prompt lenders to vigorously enforce payment deadlines and use of collection agencies. The bureau is also restricting loan-modification fees, which will likely limit lenders’ options for customizing loans. In sum, the bureau’s notion of “improving outcomes” will likely result in fewer mortgage options for consumers and higher borrowing costs.

Mortgage Servicing. The bureau has issued more than 500 pages of rules for mortgage servicing, which encompass the collection of mortgage payments, maintenance of escrow accounts, loan modifications, and foreclosures, among other functions.[60] Many provisions dictate the timing, content, and format of disclosures. The rules coincide with provisions of a settlement between states and the five largest mortgage-servicing banks that had been accused of mistreating borrowers. Bureau officials are hyping the proposed regulations as the solution to the wave of foreclosures in recent years.[61]

Lenders will face more requirements in processing a foreclosure, but that will not save borrowers who, for a multitude of reasons, cannot afford their payments. It does make mortgage servicing more time-consuming and costly. The burden of such rules falls disproportionately upon community banks, which have far fewer resources to reconfigure services. To the extent that the CFPB’s regulatory onslaught overwhelms small banks, their larger brethren benefit—becoming all the more powerful as community banks close. That is the very outcome that Dodd–Frank supposedly was enacted to prevent.

Of particular concern are the proposed obligations on servicers’ dealings with a delinquent borrower. The bureau seems to think it is the responsibility of servicers to rescue such borrowers from their predicament. For example, servicers are now required to inform borrowers about financial “counseling,” while also being prohibited from initiating a foreclosure sale until the delinquent borrower has exhausted his or her options and appeals.

Another provision prohibits servicers from obtaining “forced place” insurance following a finding that the borrower has failed to maintain property insurance as required. Instead, servicers are required to give borrowers two opportunities to produce proof of insurance over 45 days before charging for insurance, as well as provide advance notice and pricing information to the borrowers and allow them to obtain their own replacement insurance. In other words, borrowers who have violated the conditions of their mortgage by failing to maintain home insurance must be given a second chance (or third or fourth) to honor the terms of their mortgage agreement.

Such requirements significantly reduce lenders’ control over the loans they make.

Qualified Mortgages. Of enormous consequence to the fate of the housing market is how the bureau defines a “qualified mortgage.” The definition is central to a provision of Dodd–Frank that requires lenders to determine a borrower’s “ability to repay” any loan “secured by a dwelling.”[62] The qualified mortgage requirements act as the standard for loan terms that lenders can reasonably expect a borrower to repay. Under this “ability to repay” regime, the lender—not the borrower—can be blamed for a loan default. Dodd–Frank allows homeowners to sue lenders if they cannot make their payments and face foreclosure.[63] Such standards effectively require banks to act as personal advisers or intermediaries despite long-held legal precedent that they are not fiduciaries in retail banking.

But how does a lender guarantee that a customer understands the terms of a loan? And, in the event that a bank deems customers’ understanding as deficient, is that bank at risk of violating fair lending laws? CFPB officials have emphasized that they will aggressively monitor firms to ensure that financial products and services are available to various racial, ethnic, and gender groups in direct proportion to their share of the population.[64] Thus, lenders are trapped in a Catch-22: To abide by the “ability to repay” rule could mean not meeting race and gender quotas, or vice versa.

“Payday” Lending. A total of 48 states already regulate payday lending, and yet the CFPB is proposing to dramatically limit the availability of small-dollar, short-term loans.[65] The proposed payday rules would limit the interest rates that payday lenders can charge, prohibit borrowers from taking out more than one loan at a time, and require lenders to assess the borrower’s ability to repay. In effect, the regulations would make it difficult, if not impossible to offer this type of loan, which would have a disparate impact on the low-income households and immigrants who rely on them.

According to Heritage Foundation Research Fellow Norbert J. Michel, the CFPB’s own complaint database does not support the claim that there is a systemic problem in this industry.[66] From July 2011 to August 2015, Michel noted, consumers lodged approximately 10,000 complaints against payday lenders. Ignoring the fact that these are unverified complaints, the figure pales in comparison to the more than 12 million people per year using payday loan services.

There is a great deal of misinformation spread by critics about small-dollar loans. One of the most common claims is that payday lenders gouge customers by charging a high annual percentage rate. Such criticism is misplaced, in part because it misuses the APR concept.[67] Properly used, the APR represents the actual rate of interest someone pays over the course of a year due to compounding, the process whereby interest is added to unpaid principal. However, in a typical case, payday loan customers do not borrow for a full year, and the interest charges do not compound. Thus, there usually is no APR on a payday loan.

The bureau’s regulatory framework is based on the false claim that short-term lenders systematically prey on customers who cannot repay their debts. The evidence does not support such a claim.

Prepaid Cards. General purpose reloadable cards (GPRs) have exploded in popularity. According to one recent study, the share of spending with prepaid cards increased 200 percent between 2009 and 2014.[68]

Consumers obviously find the cards useful. One would not know it from the stance of CFPB officials, who are eager to impose the same degree of regulation that has made checking accounts and credit cards more costly—and induced consumers to turn to prepaid cards. In its notice of proposed rulemaking, the CFPB claims to be “particularly interested in learning more about this product.” Yet even before “learning more,” the bureau has already decided to propose new regulations,[69] which would impose many of the same requirements on prepaid cards that currently apply to credit cards—which would raise costs.

Prepaid cards are available with a variety of terms and fees that vary by issuer. Those options are beneficial to consumers—particularly so to the “unbanked” and “underbanked” users who heavily rely on the cards. To the extent that regulators impose service conditions and requirements, fewer firms will offer the cards, while the cost of those that remain will rise. Innovation of this nascent product will be inhibited as well. Indeed, the bureau also intends to regulate mobile devices that access consumer accounts—a grossly overbroad use of its powers.[70]

Reform Alternatives. The best option going forward is outright elimination of the CFPB through repeal of Title X of the Dodd–Frank Act. Authority for the 18 pre-existing consumer protection laws assumed by the CFPB should be returned to the seven agencies that originally administered them. However, it is not enough to simply return to the old regulatory model. There is considerable regulatory overlap that Congress must eliminate—along with numerous obsolete rules. The goal should be to devolve authority for consumer protection to the states except when interstate regulation is unavoidable.

More immediate relief requires Congress to enact the following reforms:

  • Abolish the CFPB’s current funding mechanism and subject it instead to congressional control. Although some financial regulatory agencies (such as the Federal Deposit Insurance Corporation and the Fed itself) also fall outside the congressional appropriations process, they are the exceptions rather than the rule among government agencies. Given the CFPB’s broad policymaking role, there is no justification for allowing the bureau to escape congressional oversight.
  • Strike the undefined term “abusive” from the list of practices under CFPB purview. There is no regulatory precedent or jurisprudence that interprets the term in the context of consumer financial services, and the bureau should not have discretion to define its own powers.
  • Require the CFPB specifically to apply definitions of “unfair” and “deceptive” practices in a manner consistent with case law. Otherwise, regulatory uncertainty will inhibit the availability of financial products and services.
  • Prohibit public release of unconfirmed complaint data. The publication of mere accusations can subject businesses to undeserved reputational harm and unnecessary litigation.
  • Abolish the inordinate deference in judicial review granted to the CFPB. The Dodd–Frank statute instructs judges to defer to the bureau’s regulatory decisions as if it “were the only agency authorized to apply, enforce, interpret, or administer the provisions of such Federal consumer financial law.” However, judicial scrutiny is a necessary check on the CFPB’s otherwise unconstrained powers.
  • Require the CFPB to obtain approval for all major rulemakings from the Office of Information and Regulatory Affairs. Such oversight would increase agency transparency and accountability.


The current structure of the CFPB, with its lack of accountability and absence of oversight, invites regulatory excess. Along with its unparalleled powers and approach to regulation and enforcement, the bureau’s actions can be expected to chill the availability of financial products and services. The CFPB’s paternalistic view of consumers also means fewer choices and higher costs for credit. This will undoubtedly leave families and entrepreneurs without customized options with which to invest and build wealth. Consumer protection against fraud and other misdeeds is certainly necessary, but the bureau is on a regulatory tear that extends well beyond what is reasonable. The obvious two questions to consider are: (1) Can consumers expect the federal government—with a national debt of $18.9 trillion—to do a better job of managing individuals’ finances than the individuals who know their own circumstances and preferences? They cannot. (2) Are regulators any less “biased” than consumers in their financial preferences? They are not.

—Diane Katz is a Senior Research Fellow for Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.

[1] Dodd–Frank Wall Street Reform and Consumer Protection Act, Title X, Sec. 1011(a).

[2] Including the Truth in Lending Act; the Fair Credit Reporting Act; the Fair Debt Collection Practices Act; the Equal Credit Opportunity Act; and the Electronic Funds Transfer Act. Section X of Title X includes a complete list.

[3] Those seven agencies were: (1) the Board of Governors of the Federal Reserve; (2) the Federal Deposit Insurance Corporation; (3) the Office of the Comptroller of the Currency; (4) the Office of Thrift Supervision; (5) the National Credit Union Administration; (6) the Federal Trade Commission; and (7) the Department of Housing and Urban Development.

[4] For a fuller examination of this change, see Joshua D. Wright, “The Antitrust/Consumer Protection Paradox: Two Policies at War with Each Other, George Mason University Law and Economics Research Paper No. 12-45, May 31, 2012, (accessed February 22, 2016).

[5] Section 1402 of the Dodd–Frank Act states that stricter mortgage requirements are necessary because “economic stabilization would be enhanced by the protection, limitation and regulation of the terms of residential mortgage credit.” (Emphasis added.)

[6] Oren Bar-Gil and Elizabeth Warren, “Making Credit Safer,” University of Pennsylvania Law Review, Vol. 157, No. 1 (November 2008), (accessed February 22, 2016).

[7] Consumer Financial Protection Bureau, “Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z),” Federal Register, Vol. 77, No. 164, August 23, 2012, p. 51126.

[8] The President extended this regulatory framework to all agencies in “Executive Order 13707: Using Behavioral Science Insights to Better Serve the American People,” September 15, 2015, (accessed February 29, 2016).

[9] Edward L. Glaeser, “Psychology and the Market,” National Bureau of Economic Research, Working Paper No. 10203, January 2004, (accessed February 22, 2016).

[10] News release, “CFPB’s Mass Data Collection Threatens Consumers’ Financial Safety,” House Financial Services Committee, December 16, 2015, (accessed February 22, 2016).

[11] Jonathan Thessin, “Request for Information Regarding Consumer Complaint Database,” American Bankers Association, August 31, 2015, (accessed February 22, 2016).

[12] Norbert J. Michel, “The Myth of Financial Market Deregulation,” Heritage Foundation Backgrounder No. 3094, April 28, 2016,

[13] This was 12 percent in FY 2015, for a total cap of $618.7 million. The bureau requested transfers of $485 million. See CFPB, “Financial Report of the Consumer Financial Protection Bureau,” November 16, 2015, (accessed February 22, 2016).

[14] These include the Board of Governors of the Federal Reserve, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Treasury Department.

[15] Warren reportedly pitched the idea of a consumer protection agency to then-Senator Barack Obama’s office in early 2007. She outlined her regulatory goals in: Elizabeth Warren, “Unsafe at Any Rate,” Democracy, No. 5 (Summer 2007), (accessed February 22, 2016).

[16] Proponents claimed that the President was forced to act after some Republicans threatened to block any nomination unless changes were made to the agency’s structure.

[17] National Labor Relations Board v. Noel Canning, 2014.

[18] Dodd–Frank Wall Street Reform and Consumer Protection Act, Title X, Sec. 1024.

[19] Dodd–Frank Wall Street Reform and Consumer Protection Act, Title X, Secs. 1024 and 1031.

[20] For example, the Federal Trade Commission Act was amended in 1938 to prohibit “unfair or deceptive acts or practices.”

[21] The CFPB describes supervision as “a comprehensive, ongoing process of pre-examination scoping and review of information, data analysis, on-site examinations, and regular communication with supervised entities and prudential regulators, as well as follow-up monitoring. For most depository institutions supervised by the CFPB, periodic examinations will be conducted. For the largest and most complex banks in the country, the agency has implemented a year-round supervision program that will be customized to reflect the consumer protection risk profile of the organization. The agency has implemented a risk-based nonbank supervision program that will include conducting individual examinations and may also include requiring reports from businesses to determine what businesses need greater focus.” See CFPB, “Supervision,” (accessed February 22, 2016).

[22] Consumer Financial Protection Bureau, “CFPB Supervision and Examination Manual,” Version 2, October 2012, (accessed February 22, 2016).

[23] Hearing, The Semi-Annual Report of the Consumer Financial Protection Bureau, Financial Services Committee, U.S. House of Representatives, March 29, 2012, (accessed February 22, 2016).

[24] While the investigation itself is not public, a petition to modify or set aside the CID will be made public by the bureau. See Jonathan L. Pompan and Alexandra Megaris, “What to Expect When You’re Under a CFPB Investigation—Negotiating the Scope of the CID,” Venable LLP, October 1, 2012, (accessed February 22, 2016).

[25] Ibid.

[26] Ibid.

[27] Loeb & Loeb, “CFPB Announces Rules Governing Investigations,” CFPB Alert, August 2012, (accessed February 22, 2016).

[28] Consumer Financial Protection Bureau, “Report of the Consumer Financial Protection Bureau Pursuant to Section 1017(e)(4) of the Dodd–Frank Act,” December 31, 2015, (accessed February 22, 2016).

[29] Ibid.

[30] Consumer Financial Protection Bureau, “Consumer Financial Protection Bureau Strategic Plan FY 2013–FY 2017,” (accessed February 22, 2016).

[31] Kate Davidson, “Trying to Stay Above Politics: A Conversation with Richard Cordray,” American Banker, March 23, 2012, (accessed February 22, 2016).

[32] The CFPB Consumer Complaint Database states: “We do not verify the accuracy of all facts alleged in these complaints, but we do take steps to confirm a commercial relationship between the consumer and the identified company.” See CFPB, “Consumer Complaint Database,” (accessed February 22, 2016).

[33] Consumer Financial Protection Bureau, “Supervision and Examination Manual, Version 2.”

[34] Consumer Financial Protection Bureau, “CFPB Ready to Help Consumers on Day One,” July 21, 2011, (accessed February 22, 2016).

[35] Consumer Financial Protection Bureau, “CFPB Launches Consumer Complaint Database,” June 19, 2012, (accessed February 22, 2016).

[36] Office of Inspector General, “Opportunities Exist to Enhance Management Controls Over the CFPB’s Consumer Complaint Database,” Audit Report, September 10, 2015, (accessed February 22, 2016).

[37] Office of Inspector General, “Opportunities Exist to Enhance Management Controls Over the CFPB’s Consumer Complaint Database.”

[38] CFPB, “Disclosure of Consumer Complaint Data: Notice of Final Policy Statement,” Docket No. CFPB-2012-023, (accessed February 22, 2016).

[39] Daniel P. Ray and Yasmin Ghahremani, “Credit Card Statistics, Industry Facts, Debt Statistics,” (accessed February 22, 2016).

[40] Consumer Financial Protection Bureau, “Home Mortgage Disclosure (Regulation C),” Docket No. CFPB-2014-0019, (accessed February 22, 2016).

[41] Ibid.

[42] The CRA was among a variety of low-income housing programs that contributed to the 2008 financial crisis by promoting mortgages for families who could not afford them. See Norbert J. Michel, “Government Policies Caused the Financial Crisis and Made the Recession Worse,” Heritage Foundation Commentary, January 28, 2015,

[43] Dodd–Frank, Section 1022.

[44] Government Accountability Office, “Consumer Financial Protection Bureau: Some Privacy and Security Procedures for Data Collections Should Continue Being Enhanced,” GAI-14-758, September 2014, (accessed February 22, 2016).

[45] Ibid.

[46] Consumer Financial Protection Bureau, “CFPB Bulletin 2012-04 (Fair Lending),” April 18, 2012, (accessed February 22, 2016). Disparate impact can only be justified if the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact.

[47] Rachel Witkowski, “CFPB Overestimates Potential Discrimination, Documents Show,” American Banker, September 17, 2015, (accessed February 22, 2016).

[48] In a variety of documents, agency personnel repeatedly acknowledged the weaknesses of their proxies. See ibid.

[49] By a vote of 332 to 96, the House passed H.R. 1737, which would nullify the CFPB’s indirect auto finance guidance and a notice and comment period issuing a new one. The bill also would require the CFPB when proposing and issuing such guidance to make publicly available “all studies, data, methodologies, analyses, and other information” it relied on.

[50] Sean Higgins, “Consumer Bureau a ‘Cesspool’ of Discrimination and Retaliation, Union Head Says,” Washington Examiner, June 25, 2015, (accessed February 22, 2016).

[51] Eric Katz, “Widespread Discrimination Forces Agency to Create New Pass-Fail Performance Rating System,” Government Executive, May 27, 2014, (accessed February 22, 2016).

[52] Title X—Bureau of Consumer Financial Protections, Sec. 1022 Rulemaking Authority.

[53] Dodd–Frank, Title X, Sec. 1032.

[54] Consumer Financial Protection Bureau, “CFPB Proposes Allowing Companies to Run Trial Disclosure Programs,” December 13, 2012, (accessed February 22, 2016).

[55] Consumer Financial Protection Bureau, “Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z),” Docket No. CFPB-2012-0028, (accessed February 22, 2016).

[56] Ibid.

[57] News release, “TILA/GFE Reform, Fair Lending and RESPA Tolerances Rank as Mortgage Lenders’ Greatest Compliance Concerns,” QuestSoft, April 17, 2012, (accessed February 22, 2016).

[58] Kleimann Communication Group, Inc., “Know Before You Owe: Evolution of the Integrated TILA–RESPA Disclosures,” July 9, 2012, (accessed February 22, 2016).

[59] Ibid.

[60] Consumer Financial Protection Bureau, “2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules,” (accessed February 22, 2016).

[61] In a press release announcing the proposed regulations, for example, Cordray claimed the new rules would prevent foreclosures. “Millions of homeowners are struggling to pay their mortgages, often through no fault of their own,” he said. “These proposed rules would offer consumers basic protections and put the ‘service’ back into mortgage servicing. The goal is to prevent mortgage servicers from giving their customers unwelcome surprises and runarounds.” News release, “CFPB Proposes Rules to Protect Mortgage Borrowers,” Consumer Financial Protection Bureau, August 10, 2012, (accessed February 22, 2016).

[62] Dodd–Frank, Title XIV, Sec. 1411.

[63] Jonathan Green, “Preparing for Litigation Under the Ability to Repay Rule,” National Mortgage News, February 24, 2014, (accessed February 22, 2016).

[64] Consumer Financial Protection Bureau, “CFPB to Pursue Discriminatory Lenders,” April 18, 2012, (accessed February 22, 2016).

[65] Barbara Mishkin, “New Report Shows Negative Effect of CFPB’s Contemplated Payday Loan Proposals on Credit Availability,” CFPB Monitor, June 18, 2015, (accessed February 22, 2016).

[66] Norbert J. Michel “Dodd–Frank and the Consumer Financial Protection Bureau Put Squeeze on Private Payday Lenders,” Heritage Foundation Issue Brief No. 4479, November 4, 2015,

[67] Ibid.

[68] Business Wire, “The Nilson Report: U.S. Card Spending at Merchants 2014,” May 26, 2015, (accessed February 22, 2016).

[69] “Electronic Fund Transfers (Regulation E),” Federal Register, Vol. 77, No. 101, May 24, 2012, p. 30923,!documentDetail;D=CFPB-2012-0019-001 (accessed February 22, 2016).

[70] Consumer Financial Protection Bureau, “CFPB Launches Inquiry into Mobile Financial Services,” June 11, 2014, (accessed February 22, 2016).


Diane Katz
Diane Katz

Former Senior Research Fellow in Regulatory Policy