Inside Financial Services

The Spending Spree at the CFPB

The agency will likely make credit scarcer and more expensive--and no one in Washington can stop it

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Did you see that CFPB head Richard Cordray went before a House panel last week and said he’s planning to boost his agency’s budget by 27% this year? He didn’t bother to actually ask Congress for the extra money, or even lobby for it. He simply announced that his agency will spend $448 million, whether anyone liked it or not.

I’m not sure this is what the Founders had in mind when they came up with the idea of Congress having the exclusive power of the purse. Oh, well. The CFPB can get away with stunts like Cordray’s because, unlike every other federal regulatory agency, it’s funded not via Congressional appropriation or subject to rigorous oversight. Instead, the agency has its own in-house money spigot, called the Federal Reserve. According to the Dodd-Frank Act, which authorized the agency, the CFPB can allocate itself up to $548 million from the Fed this year, and then $598 million next year. By law, the Fed can’t turn down the request. Congress plays no role in the process.

And Richard Cordray himself, you may recall, is accountable to no one, either, having been appointed to his job by President Obama via a recess appointment. No confirmation hearings. No approval by the Senate. Just a fiat-and he can spend hundreds of millions of federal dollars, without having to answer to anybody.

Given all this, you’ll forgive me if I make the observation that, as it’s currently constituted, the Consumer Finance Protection Bureau is an affront to representative democracy. No wonder Republicans vowed to not confirm anyone to head the agency until basic changes were made to its structure. It’s only natural that elected officials should recoil notion of federal bureaucrats being officially unaccountable. I’m at a loss to understand why Democrats, or any Americans, don’t feel the same way.

But put aside my civic outrage for a moment. Over the near term, the CFPB in its current form is bad news: the agency will almost certainly make consumer credit more expensive and less available, and slow economic growth generally. “I think that there is more we can provide and more we intend to provide, and we will continue to ramp that up,” Cordray told Congress last week, by way of explaining the mega-raise he was granting his own agency. Great! And what “more” do you suppose Cordray has in mind? His agency has already said it’s going to look at debt-collection practices, for example. Before you start cheering, remember that aggressive regulation of debt collectors will likely have the effect of reducing lenders’ recovery of bad debts, which will in turn force them to charge more for loans. And the CFPB is looking at bounced-check charges. That might strike you as high-minded, too, but it could result in one less alternative source of near-term funds for cash-strapped consumers. Why would that be good?

Meanwhile, you can add the CFPB’s new half-billion-dollar budget to the $1 billion the Office of the Comptroller of the Currency spends each year, and add that to the unknown billons on supervision spent by the Fed, the FDIC, and state banking regulators. That pre-CFPB regulatory regime failed spectacularly to anticipate or mitigate the housing bubble. The post-CFPB environment will be even more bureaucratic and complex. When the next crisis brews, do you think it will do any better?

Sensible regulation of the banking system is essential. But Dodd-Frank doesn’t move us in that direction. Among other things, it has given us new agency, the CFPB, that’s accountable to no one, and that will likely stifle innovation, make credit more expensive, and reduce consumers’ credit options. That’s not good for consumers and it’s not good for the recovery.

What do you think? Let me know!

20 Responses to “The Spending Spree at the CFPB”

  1. Anonymous

    Most of the time dire predictions do not come to fruition. I believe this will be the case re your view of the CFPB.
    Its time their is some bureau in Washington that will have some teeth to deal with what has been to put it bluntly a consistant screwing of the public by financial institutions. Lets take the optomistic side and see how it works before we criticize. I personally am completely in favor of the CFPB. Also as usual I never expected the Republicans to act any differently than they usually do.

  2. roanokela

    You hit a nerve! Well said because no matter how well intended its establishment was in violation of a multitude of rules – probably the Constitution. and has no oversight on any level.

  3. grover13

    I don’t think the founding fathers envisioned U.S. investment banks lobbying the government in 2005 for 30-1 leverage ratios to juice their short term profits at the expense of collapsing the entire global financial system either.

    And if by “stifle innovation”, you mean “take the time to study and regulate all new products so everyone understands how they work, what the risks are, and how they can be transparently valued at the end of every day”, then….GOOD.

  4. Fraudster

    Cordray’s budget is chump change compared to that of the bank lobbyists and a rounding error compared to the bailout money given to the banks, AIG and Goldman Sachs.

  5. hcitsLA

    In all of the regulatory reform and backlash against the banking industry, can someone tell me why they did not do the one thing they should have done which was to reinstate the Glass Steagall Act?

  6. NC Bank Advisor

    Couldn’t agree more. I attended a presentation there 2 weeks ago. Scary.

  7. Jack

    You suggest sensible regulation of the banking system but where is that going to come from? For years I have believed in free enterprise etc. but when you review the banking activities (and the problems they caused) and the compensation these people have received something has to change. Perhaps the perceived complete autonomy of the CFPB is reason for concern however before you become too critical perhaps you should consider what they are trying to accomplish and the benefits to the average person because of their efforts. I have a good understanding of the financial services industry as well as what is happening at the CFPB and I must tell you that your comments are not very soundly based.

  8. Ken Greenberg

    Right on, Tom. But this, sadly, is just the beginning. And, worse, what Republican candidate – or the lot of them – has been able to articulate why this is bad. The Economist had a great article on Dodd-Frank: Too Big NOT to Fail – see it here: http://www.economist.com/node/21547784. Imagine – the entire U.S. banking system was created in 29 pages. Dodd-Frank is 848, and just 11 pages alone, dealing with the “Volcker Rule” have already spawned a 298 page additional proposal, which includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. This administration is out of control. Where does Corday get the audacity to grow his budget by 27% when we have record deficits and a $16+Trillion national debt. It IS an affront!

  9. dectra

    Generally, I enjoy your posts. But I must say, this article is an affront to me. To whine that a different agency, one that was NOT the CFPB didn’t do it’s job and somehow, that correlates to the fact that the CFPB is not up to the task of doing ITS job is nuts.

    Lack of banking oversight was a direct and proximate cause of a big portion of the mess we are in. The CFPB is trying to clean the Aegean Stables that Wall Street has become, and I for one, say let them try before you start blasting away at an agency that only recently got started.

  10. jsc173

    Here’s what to look out for in CFPB. Who is Cordray hiring? Is he hiring career bureaucrats from the other federal banking supervisory agencies? If so, who believes this will result in anything other than an incremental regulatory burden on every institution that CFPB chooses to include in its yet-to-be-determined examination process? If, however, many key hires are from the industry, with real world expereince, there may be hope that CFPB’s oversight of the industry will, net-net, result in an improvement in consumer protection that may actually result in improved long-term profitability for the industry. It’s possible. Not probable, but possible.

  11. Ken Greenberg

    Right on, Tom. But this, sadly, is just the beginning. And, worse, what Republican candidate – or the lot of them – has been able to articulate why this is bad. The Economist had a great article on Dodd-Frank: Too Big NOT to Fail – see it here: http://www.economist.com/node/21547784. Imagine – the entire U.S. banking system was created in 29 pages. Dodd-Frank is 848, and just 11 pages alone, dealing with the “Volcker Rule” have already spawned a 298 page additional proposal, which includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. This administration is out of control. Where does Corday get the audacity to grow his budget by 27% when we have record deficits and a $16+Trillion national debt. It IS an affront!

  12. mudwall jackson

    “And the CFPB is looking at bounced-check charges. That might strike you as high-minded, too, but it could result in one less alternative source of near-term funds for cash-strapped consumers. Why would that be good? ”

    Do you believe in the divine right of banks to make a profit? You consistently defend the worst and most abusive bank practices as somehow necessary to the existence of the industry. Regulate them and Western Civilization is doomed as a consequence. How about the banks that make money the old fashioned way by providing superior products and services and building customer loyalty?

  13. Texascommunitybanker

    Points well made Tom! The banks were actually assured by Cordray that the CFPB would focus on the shadow banks and non-bank lenders and their largely unregulated business models, from pay day lenders to independent mortgage brokers. Note that for the most part their upcoming focus is squarely pointed at… you guessed it, the already heavily regulated commercial banks! Nothing like stifling the nation’s banks to keep pressure on a moribund economic recovery.

  14. Cicero

    CFPB is blatantly unconstitutional but it’ll take a while to work its way to the Supreme Court. Obama’s oath to preserve, protect and defend the Constitution is a hollow joke.

  15. Gmoney

    Atlas Shrugged described this path in detail. Now what do we do? Who is John Galt?

  16. one guy's opinion

    Tom,
    well, if the man is really accountable to no one, maybe he’s also going to be immune to lobbying by super PAC’s which have been given free reign by that incredibly undemocratic Citizen’s united opinion. Maybe he can do the right thing, rather than acting for the money!

    Talk about civic outrage. I don’t recall a ‘corporate person’ among the founding fathers.

  17. Luke Skywalker

    Sean Ryan of SNL’s characterization of the CFPB as the “Death Star” is apt.

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