The CFPB: Let’s Make Sure the New Cop on the Beat Isn’t Relegated to a Desk Job

To introduce itself to Americans, the CFPB calls itself a cop on the beat to patrol the consumer financial services industry and hold law-breaking financial companies accountable. This is an excellent characterization of what the bureau should do. After all, predatory financial products and services previously flourished without any restraint because there wasn’t anyone keeping watch over them. Now that the bureau is established, can it be an effective cop on the beat, or is it merely a cop with a desk job?  That’s a key question to be determined as the bureau starts to define its supervisory and enforcement authorities.

The CFPB was created through the Dodd-Frank Act which was geared towards eliminating the causes of the Great Recession and preventing future crises. Predatory financial products and services were a contributory cause of the Great Recession because they tipped American families into financial instability. To stop current predatory practices and prevent new ones from arising, the CFPB was granted supervisory and enforcement authority over providers of consumer financial products and services. The supervisory and enforcement authority allows the CFPB to examine a provider’s finances and business practices and prevent the release of predatory financial products and services. However, given the expansion of the financial services marketplace, the CFPB’s authority doesn’t automatically apply to all providers.

As the law was written, the bureau’s authority definitely extends over large banks and providers of home mortgages, student loans and payday loans. The bureau can also work with regulators of small banks to watch over their offerings. Still, there are a slew of other providers that may or may not be actively scrutinized by the CFPB. Filling this supervisory and enforcement authority gap depends on the discretion of the bureau’s leadership.

If the gap persists, vulnerable populations of consumers remain subject to predatory financial products or services from non-bank providers – a problem that contributed to the financial instability of subprime consumers and that was supposed to be addressed by the creation of the CFPB. If the gap isn’t closed, the CFPB’s ability to patrol the beat will be, for all practical purposes, superficial, much like a cop who has been relegated to a desk job, processing criminals who have already broken the law or doing routine paperwork rather than watching for potential troublemakers.    

Who are the providers that may fall in this gap?  They are alternative financial service providers that are evolving to meet consumer demand, particularly from low income consumers, for accessible financial services. Big box retailers are an example of alternative financial service providers that have gotten some attention recently. The Washington Post featured the expansion of financial services such as check cashing, money transfers, prepaid cards and bill pay at Kmart, Wal-Mart and Best Buy (see article here). Retailers see a real business opportunity by extending into financial services, but they, and other alternative providers such as internet and mobile providers, may escape oversight unless the CFPB takes care when defining two open clauses in the Dodd-Frank Act.

The first open clause allows the CFPB to have supervisory and enforcement authority over “a larger participant in a market for other consumer financial products or services.” This clause has the potential to bring large, non-bank entities offering financial products and services, like Wal-Mart, under the authority of the CFPB. It is up to the CFPB, in consultation with the Federal Trade Commission (FTC) to define this clause. To help the CFPB retain the widest coverage of alternative providers, the “larger participant” clause should first define markets narrowly by product type and outlet. This would allow the CFPB to gain oversight of different providers as the financial services industry innovates.

By this definition of markets, prepaid cards issued by a retail outlet would be a market distinct from prepaid cards issued by an internet-based company. While having narrower market definitions would require the CFPB’s research department to have strong analytical capabilities, it is the bureau’s best chance at gaining supervisory and enforcement authority over a wide range of providers that would usually fall through the regulatory cracks.  

The second open clause allows the CFPB to have supervisory and enforcement authority over anyone determined to “[be] engaging, or [have] engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”  This clause opens the door for the CFPB to rope in providers that may originally fall through regulatory cracks, but raise red flags on the ground in communities. For example, predatory services, like payday lenders, gained the attention of legal aid lawyers and other community advocates before regulators. Unfortunately, there were limited avenues at the time to stop the payday lenders.

Through the “risky conduct” clause, the CFPB is allowed to judge whether or not any provider of financial products or services is subject to their oversight and enforcement, rendering it a potentially powerful warning to providers to stay away from any behavior that poses risks to consumers. What the bureau find risky conduct determines the reach of its authority. To help the CFPB retain the widest coverage under the “risky conduct” clause, any complaint that comes through the bureau’s hotline from a consumer or community advocate or the flagging of behavior that is highly likely to cloud consumer judgment by a regulator should trigger a notice to the accused provider, requesting a response to the allegations. This would require the bureau to effectively manage its complaint management capabilities, but would help to capture bad practices before they harm a large population of consumers.          

How the CFPB defines the open clauses will impact its scope and actual ability to protect consumers, proving once again that “the devil’s in the details.”  The details are tedious, complicated and hard to understand. As the Washington Post points out, alternative providers, like retailers, are getting a seat at the table to watch over the details as they evolve. Consumer advocates should be prepared to do the same as well.