The CFPB Was a Whopping Success. Why Was It Gutted?
Could it have to do with the fact that Elon Musk is launching a payment platform on X and wants less oversight? Consumer finance expert Mallory SoRelle breaks it all down.
Mallory SoRelle is an assistant professor at Duke University’s Sanford School of Public Policy. She’s an expert on consumer finance and author of Democracy Declined: The Failed Politics of Consumer Financial Protection. I spoke with her for this Salon article in the wake of the disembowelment of the Consumer Financial Protection Bureau, the federal entity tasked with protecting consumers from predatory practices of financial institutions.
TL;DR: The Consumer Financial Protection Bureau (CFPB) returned $2.75 to consumers for every dollar spent on running it. Now that the CFPB is toothless, you’ll need to rely on your attorney general’s office for justice in a feud with a bank or payment system—if that service is even offered in your state. Just last week, millions of dollars in savings were frozen from Evolve bank customers who used an app called Yotta. This sounds like a job for the CFPB, but sadly, those customers are probably on their own now.
Vanessa McGrady: Why is the CFPB a target of this administration?
Mallory SoRelle: If we take everyone at their word, we can come up with a few different reasons. One of the things that we've heard in the news is Bureau is somehow inefficient or wasteful. There's a lot of evidence to suggest that simply is not true. But the reason people make that criticism is because, prior to the creation of the CFPB, there were a bunch of existing financial regulatory agencies that were tasked with doing some of the work that the CFPB does.
Most of these agencies were all created to prioritize the profitability and soundness of banks. When Congress started making laws to protect consumers’ finances, they brought in representatives from some of these existing agencies who had banks as their primary clients. And the representatives from those agencies essentially said, “We think this law is a good idea, but we don't really have any expertise in this. We don't have the investigative staff. We don't really know much about the consumer protection space.”
Congress basically said, “Oh, we think you'll figure it out,” and gave them the job anyway. But they just weren't designed to do that. And I would say they weren't particularly effective at doing it.
VMc: Can you name a couple of those agencies?
MS: The Office of the Comptroller of the Currency, or the Federal Reserve Board, or the FDIC. We have a whole set of federal financial regulatory agencies that have cropped up over time. And it's a little unusual—in the U.S., our financial regulatory agencies are essentially designed to serve certain industries. For example, one agency might be in charge of national banks of a certain size. One might be in charge of state-chartered banks that are members of the Federal Reserve System. One might be in charge of credit bureau or credit unions. They each have their own set of client institutions, and they develop expertise in those various areas.
Not only did they not have the expertise to do that, but they also had to coordinate pretty frequently, because when a consumer financial protection rule came down, it often affected like multiple types of financial institutions. The more people you have trying to make a decision, the harder it is to make and they would just adopt the easiest choice, which was usually the lowest regulatory bar possible because that was what they could agree on. [This led to] the ramping up of predatory lending helped promote the conditions that led to the 2008 financial crisis.
VMc: Let's talk about why you think that this was targeted by this administration.
MS: There are a few reasons. Republicans in Congress have long been opposed to CFPB. There are a couple of things they don't like about it, structurally. One is that its funding does not come from annual appropriations of Congress. It comes more directly from the Federal Reserve Board. It's worth noting that that's how the law was written by Congress, and it was done intentionally to make sure that the CFPB was insulated from political and partisan pressure. Congress still controls the budget to an extent, because they put a cap on how much the CFPB can get every year, but they don't have to go directly to Congress. Every time there's a change in Congress, the CFPB doesn't have to worry about their budget getting decimated. And that was intended to make sure that the agency can remain doing active work on the consumers, but also can provide more stable services, because you don't want instability in the financial market.
VMc: I don't understand why Republicans wouldn't want their constituents to be protected. I do understand that they are probably on the side of business. But why is it so offensive to them that their constituents would not have those same protections?
MS: I think they would argue that the CFPB makes it too expensive for banks to lend to more people. This is the argument that always gets made, and I will be honest, I'm always a little bit skeptical of the extent to which is true. But the basic argument is the more burdens you put on industry in terms of regulations, the either the more they're likely to restrict access to financing, or they're going to have to charge more for it, or something like that. If you can lower the regulatory burden, then companies can extend more finance to more people.
Historically in the US, federal policy makers have found it more politically palatable to incentivize private actors to expand access to credit and financing to help people have purchasing power then they have found it to enact public goods provision right to do the same thing.
So we don't have free college in the U.S.; we have student loans. We don't have a ton of investment in public transit; we make it really easy for people to get auto loans. We don't have particularly robust social welfare support, but we make it really easy to get a credit card. That's been an active policymaking choice.
VMc: Obviously they're not able to do this on their own and self-regulate, because there have been so many egregious breaches of public trust and misuse of their money. What can we expect? I know the CFPB is a moving target, it’s not dissolved but it’s considerably weakened. If it is not restored in whole, what can consumers expect to see that's different?
MS: It is likely that in some form, the CFPB will potentially shrink in terms of its actual staff, which just then makes it harder for them to carry out as many activities as they are. So that could mean weakened enforcement—when companies break the law, they're not being gone after in the same way.
The CFPB has essentially put over $21 billion back in the pockets of over 200 million consumers in the last 14 or so years.
We expect there to be much less active rulemaking on behalf of consumers; that happened to a large extent in the first Trump administration. They continue their activities, but less aggressively, depending on the degree to which the CFPB is gutted from the inside.
What is likely to happen, depending on the severity of cuts at the CFPB, is that state attorneys general are probably the next line of defense. They have the legal power to enforce federal consumer financial protection, and in fact, the CFPB, under the previous administration, anticipating some of these consequences, actually issued a report outlining strategies that states could embrace to help pick up the slack. But the problem is that states, first of all, are not as well-resourced as the CFPB, so there's a limit to what they can do, but states also have differential ability to enforce consumer financial protection law against different types of financial institutions. One real concern here, and something we've actually seen coming out of industry itself, is that, the CFPB had a lot of market wide coverage, but their main job was overseeing large financial institutions. In the absence of the CFPB, states continue with their regulatory enforcement missions.
VMc: Let's boil this down for the consumer. What does that mean?
MS: Nobody's quite clear who has oversight over this new financial technology or FinTech services. We're not really sure if some of these products count as credit or if maybe there's something else. If you tried to buy anything online recently, you've probably seen one of those “buy now, pay later” options crop up. The CFPB recently argued that those are actually forms of credit, and they fall under the existing federal protections for consumer financing, which means that there are some information disclosure requirements, there are some protections for consumers, potentially, some caps on fees that can be charged, certain things that those companies can't do to harm consumers.
If you're in a state where the government is deciding to regulate these more stringently, you are going to have more protection. If you're in a state where they're not, then you won't so one thing is that consumers are going to experience a patchwork of different levels of protection. Second, a lot of the state attorneys general are going to have limits to what they can enforce with existing consumer protection laws. We may not be seeing companies that are essentially breaking the law punished in the same way, which means actually less money back in the pockets of consumers.
We're also going to see a lot of the rules that those CFPB was about to implement potentially stop, and that has some significant harms for consumers. The CFPB recently adopted a very popular new rule that would remove medical debt from people's credit reports. The logic being that like if you go into medical debt, the reasons are probably not the same, right, if you go into credit card debt, and that's maybe not a great predictor of your ability to repay a loan, and that can help more than 15 million Americans see a tangible boost to their credit score, which means for those 15 million Americans, they could have access to lower cost credit cards and loans other types. It also means things like being able to rent an apartment more easily because a lot of landlords look at your credit score, it means getting access to cheaper insurance rates, so that's a pretty significant benefit to a lot of people that may not go into effect. Now the same is true for recent rules that we're going to cap overdraft fees and late fees on credit cards to a much more manageable amount for consumers, that is, that's millions and millions of dollars that may not go back into consumers’ pockets.
VMc: It sounds like this is also going to hurt the most vulnerable people who tend to need those services more.
MS: Yeah, that's absolutely the case.
VMc: What should people do now, now that we can't rely on this bureau? What if there’s a dispute on PayPal or Elon Musk’s X payment platform?
MS: The question about X is a really interesting one. When you asked about some of the reasons people want to get rid of this, the elephant in the room right now is that one of the types of financing that they have to look into regulating were these peer-to-peer payment systems. In the current moment, when someone who is ostensibly in charge of some government function related to CFPB, and also potentially now has access to a lot of sensitive, proprietary financial information about his potential competitors, is trying to launch a payment, a peer-to-peer payment system that would have been regulated by the CFPB and maybe now won't be. That's a pretty significant conflict of interest.
For now, the complaint database that the CFPB is still available and people should file complaints there. The CFPB historically has done a really good job of trying to help consumers navigate those complaints. But you know your state consumer financial protection apparatus, so the Attorney General's office and whatever your state Consumer Commission looks would be the next best port of call for consumers.
The CFPB is a popular organization, and most of the things they've done have a lot of approval from voters, including a lot of Republicans.
We just don't treat things like consumer financial regulation as political issues in the same way we do with something like a tax on Social Security. But that doesn't mean we can't. In fact, one of the best things that could happen is for ordinary folks, most of whom like the presence of the CFPB, is to make your voice to call your representative and tell them that you don't want to see this dismantled and put actual political pressure on members of Congress.
VMc: Why wouldn't a bank want to do the right thing, or why wouldn't a credit card company want to do the right thing in terms of its users and consumers? There is, there is a lot of competition.
MS: This is not a monolithic industry, there are a lot of banks and financial institutions that are trying to issue good products, that care about the quality of their products. They don't want consumers who are going to have trouble paying back their loans, because that could be bad. But there are also unscrupulous lenders, and there are some arenas in which that is probably more common than others.
One of the things we'll see actually is some pushback within specific industries. I don't think it's fair to say that all of these financial institutions are out to defraud people, but it's also true that there are a lot of financial institutions that have historically engaged in practices that break the law, that engaged in discriminatory practices or unfair practices, or are simply focused on profits and are charging fees that are disproportionately hard for certain types of people to pay for.
VMc: Unfortunately, so many people are not financially literate. How can they protect themselves from, say, a high interest rate or insane fees or something that perhaps the bureau would have covered before. What should regular people do who maybe don't feel literate in that way?
MS: One of the things that the CFPB does is provides a lot of educational material, and so strictly that, at least for now, is still available and state attorney general websites often also have that information. But I want to push back a little bit on the financial literacy piece, because there are things that are complicated about financial products, for sure, but the larger problem is less about people not knowing necessarily what they're getting their salt getting themselves into, versus not having good options. If you talk to folks who take out payday loans, they're not doing it because they think payday loans are a great product. Most of them understand that they're predatory. It's that they don't have a good alternative, People who are stuck paying overdraft fees on their bank account, or who are incurring late fees on their credit card—it’s not that most of them don't understand that happening. It's that they actually just don't have the resources to avoid them, which is why the CFPB is stepping in and saying, “Okay, we're going to actually cap the kinds of fees you can charge so that they're more reasonable.”
VMc: Anything else people should know?
MS: The big thing for me is if you value the work that the CFPB does, and you want your pocketbook protected, then you got to show up for it the way that it would show up for you. And that means, contacting your elected officials to tell them to stop what's happening.
ADDENDUM: I followed up to ask about the return of investment the Bureau returns to American consumers. She said: “That is a great question without a clear answer. If you look at just the amount returned to consumers through enforcement actions ($21 billion dollars over the lifetime of the agency), you could estimate a direct return based on the cumulative annual budgets of the agency. You can get that budget data from the annual reports.
My very quick back of the envelope math is that, if we only account for enforcement actions, the CFPB has put roughly $2.75 back in the pockets of American consumers for every $1.00 spent on running the agency over its lifetime:
Money returned from enforcement ($21 billion) / Money spent on CFPB budget ($7.6 billion) = $2.75
But those numbers don’t account for the money that consumer save from the agency rulemaking, complaint handling, educational activities, or other supervisory activities, so it would be a conservative estimate. For example, the agency’s own estimates suggest that the 2024 overdraft rule alone could save consumers $5 billion each year—significantly increasing the return on investment from just one single rule. Even if the actual savings ended up being lower, that is a huge potential return.