The Consumer Financial Protection Bureau (commonly known as the CFPB) is an independent financial regulator that oversees consumer finance markets, including mortgage products, student loans, and credit cards. The CFPB has authority to write new rules, supervise certain financial companies, and enforce consumer protection laws through fines and arbitration. They also have authority to restrict unfair, deceptive, or abusive practices that harm consumers, enforce laws that outlaw discrimination and other unfair treatment in consumer finance, and research consumer behavior relating to financial products and services.
The CFPB was created by the Wall Street Reform and Consumer Protection Act of 2010—a landmark law, passed in the aftermath of the financial crisis, that set in motion wideranging reforms to the financial system. The Bureau opened its doors a year later, on July 11, 2011. The agency was conceptualized and built by Senator Elizabeth Warren; however, in large part due to strong Republican opposition to her involvement, President Obama appointed Richard Cordray, the former Attorney General of Ohio, to be the CFPB’s first and current director.
Prior to the CFPB’s creation, there was no single federal authority with primary responsibility for preventing consumer abuse or predatory practices emanating from financial institutions.
Since its inception, the CFPB has been a political lightning rod. Republicans in Congress regularly attempt to weaken its authority, arguing that new rules designed to protect consumers will excessively constrain consumer choice and burden businesses. Democrats, on the other hand, generally consider it to be a primary part of President Obama’s legislative legacy and a long-overdue institution in an otherwise fragmented regulatory landscape.
What kinds of financial companies does the CFPB have the authority to regulate?
The answer is somewhat complicated. Financial companies that fall under the CFPB’s watch can be grouped into three categories:
- Banks, thrifts, and credit unions that have more than $10 billion in assets. (Roughly 6,500 smaller community banks are exempt from the CFPB’s regulatory reach.)
- Mortgage companies, payday lenders, and private education lenders, regardless of their size.
- “Larger participants” in other consumer finance markets, including debt collection, consumer reporting, auto financing, and money services businesses. (The CFPB has authority to determine what qualifies as a “larger participant” after going through a formal rulemaking process and considering public comments. For example, the Bureau determined that a “larger participant” in debt collection is a company with more than $10 million in annual receipts; for auto financing, a company with more than 10,000 annual originations.)
What has been the CFPB’s primary focus so far?
Mortgages.The CFPB has issued hundreds of new rules designed to protect consumers, with the majority of those to date focused on reforming mortgage lending practices in the aftermath of the housing crisis. The CFPB led efforts to develop an “ability to repay” standard to ensure that mortgage lenders ended the practice of making “no doc” or “low doc” loans—a practice common prior to the housing crisis, in which lenders extended mortgage credit to homebuyers with little or no documentation to verify their incomes or assets. A major priority of the Bureau was developing new “Know Before You Owe” disclosure forms, which require lenders to present information on the terms of a loan to borrowers in plain English. After years in development, mortgage lenders were required to use the forms beginning last October.
Student loans. The CFPB is the only federal regulator with authority over student loan servicers. With more than 10 million student loan borrowers either delinquent or at risk of delinquency, the CFPB researches problems in the market, mediates disputes between borrowers and servicing companies, and holds servicers that engage in illegal practices accountable by imposing fines and obtaining restitution for harmed consumers. They have stepped up investigations of major student loan servicers, including Wells Fargo, in recent months. If widespread problems are found, the CFPB has authority to issue new rules governing student loan servicing.
Credit cards. In addition to performing in-depth research into credit card markets, the CFPB has kept a close eye on credit card issuers, levying major fines on banks and other providers of credit that have violated consumer laws. The Bureau has returned almost $2 billion to consumers who were subject to unfair billing, deceptive marketing, and similar practices, including a landmark $727 million fine against Bank of America. The Bureau has also developed new credit card agreement forms that present information simply and clearly, although it doesn’t have the authority to force issuers to use them and no major card company has done so yet.
Payday loans. This spring, the CFPB is expected to publish new rules that attempt to reform payday loans, often marketed to vulnerable consumers, that trap consumers in a cycle of debt, fail to underwrite for affordable payments, and can result in vehicle repossessions or account closures. Roughly 80 percent of these financial products are rolled over at high cost, and up to 12 million Americans use payday lenders in a given year.
Debt collection. Consumers submit more complaints about debt collection practices to the federal government than any other area of consumer finance, with the CFPB receiving almost 170,000 complaints from consumers just last year. The CFPB has conducted in-depth research into debt collection practices and undertook a groundbreaking national survey of 10,000 consumers to inform future rulemaking efforts.
Arbitration clauses. Many financial institutions utilize arbitration clauses to prevent consumers from attempting to resolve dispute through litigation. The CFPB is considering new rules that would prevent consumer finance companies from foreclosing on consumers’ ability to bring class action lawsuits in their terms of agreement.
How does the CFPB engage with the financial technology sector?
Some companies have criticized the current state of consumer regulations as dampening innovation in areas including lending, payments and deposit taking, arguing that a lack of clarity prevents start-ups from knowing whether they would be crosswise with the CFPB. To that end, the Bureau launched Project Catalyst—an initiative that aims to engage with innovators that are developing new types of financial products and services.
Last month, the Bureau finalized a new policy designed to help lift uncertainty in relation to financial technology and the development of new products and services. The policy encourages fintech start-ups and traditional banks to apply for a so-called no-action letter. The letter would affirm that Bureau staff “reviewed the company’s application, and have no intention to recommend enforcement or supervisory action with respect to the particular aspects of the company’s product and under the specifically-identified provisions and applications of statutes or regulations that are the subject of the no-action letter.”
The CFPB’s most significant area of involvement in terms of fintech has been in the payments sector. Last summer, the Bureau issued guiding principles to help ensure that new payment systems address consumer interests. The CFPB has also taken enforcement actions against payment processors linked to debt collection scams and mortgage lending practices.
In late 2016, the CFPB spoke out about reports that some financial institutions were considering curbing consumer data access to their personal financial data, indicating that consumers should have full access to their own data, including granting third parties access to that data. CFPB Director Richard Cordray reiterated his stance one month later.
Most recently, the CFPB reached a settlement with a financial-technology startup—a digital payment company—for allegedly misrepresenting their consumer data protection practices and failing to have appropriate data security protocols in place. The CFPB’s action against the company was one of its first challenges to a startup in the fintech sector.
It’s unlikely to be the last. Earlier this month, the CFPB announced it would start accepting consumer complaints related to online marketplace lenders. The CFPB already maintains consumer complaint centers for credit cards and other products; it then forwards specific complaints to the company at issue and mediates the dispute, with the expectation that most complaints should be resolved within 60 days.