Treasury plan could change U.S. consumer financial oversight, despite obstacles

NEW YORK (Thomson Reuters Regulatory Intelligence) - There is much for critics of the U.S. “administrative state” to like about the Treasury Department’s case for curbing the Consumer Financial Protection Bureau. The long-awaited study is short, however, on the kind of practical, political vision needed to reform an agency that the Trump administration appears to have grudgingly accepted as here to stay in one form or another.

U.S. Treasury Secretary Steve Mnuchin speaks at the SelectUSA Investment Summit at National Harbor, Maryland, U.S., June 20, 2017.

The U.S. Treasury’s report was seen as making a case that the CFPB has too much unchecked power. It proposes ways to peel back the bureau’s authority by cutting its supervisory role, eliminating duplication with other agencies and ceding non-bank regulation to states.

The report sounds the political notes of the Trump administration’s deregulatory agenda by charging the agency has abused its power, but it is short on tactics. Still, legislative experts said, the plan has a chance to spur Congress to move on smaller and more practical approaches.


“Most of the these things have to be changed by legislation and it is going to run into resistance,” said Don Hawthorne from Axinn, Veltrop & Harkrider, who predicted that the plan to change the agency “will be less a headlong assault than a chipping away at its authority.”

The blueprint the administration laid out for revamping the CFPB will require lawmakers to lend significant support. Democrats led by Sen. Elizabeth Warren, who helped establish the agency after its creation under the 2010 Dodd-Frank Act, will be strongly opposed. Even some Republicans may be skeptical about the political wisdom of taking on an agency that has recorded some high-profile wins against big banks and other financial services firms. Even legislators favoring the changes are likely to await resolution of a court challenge over the agency’s constitutionality before revamping the agency.


Among the potential paths for curbing the agency, the administration could try to curb the CFPB by fighting in Congress to take control of its budget and possibly move to dismiss its director, Richard Cordray.

“The budget is the only piece of the Treasury recommendation that is potentially viable,” said Alan S. Kaplinsky, who heads Ballard Spahr’s consumer finance practice. “Everything else requires a filibuster-proof majority.”
 The agency is now funded independently by the Federal Reserve, although legislators could attempt during the overall budget process to challenge the funding.


The agency’s success in winning a settlement with Wells Fargo over the mass creation of phantom customer accounts helped give it ammunition against critics. But in Congress, the threat of sharp budget cutbacks could be used by Republicans as an opening bid to pressure Democrats to join a compromise plan to retool the agency’s structure. Government sources say that there is room to enact some bipartisan reforms, particularly in the unusual single-director governance of CFPB. Members of both parties are said to be supportive of a plan that would give Congress more oversight and create a board similar to the Securities and Exchange Commission.

The document hints that the political support for a consumer finance overseer remains.

It critiqued the bureau with a vague charge that it “has hindered consumer choice and access to credit” by imposing too many rules on lenders. Both parties have questioned the strict mortgage lending standards the bureau has set down, arguing the standards have shut some credit-worthy borrowers out of the housing market. Criticisms of CFPB regulation on smaller banks and lenders has also been voiced by members of both parties.

However, the report appeared to recognize the difficulty of eliminating the consumer finance agency entirely, as much as some critics might wish to see it gone. The CFPB has “an important mission,” the Treasury report said, in “protecting consumers’ interests.” There was no revival of the campaign-trail vows President Donald Trump made to eliminate the agency.


The Treasury Department did take a strong swipe at one of the biggest powers of the CFPB in deciding to push for the elimination of its oversight of non-bank financial services firms, such as payday lenders, mortgage originators and debt collectors.

The Treasury report said, “Supervision of non-banks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.” That will win fans among those who want to trim back the federal government’s administrative role, but banks will be less pleased, said Kaplinsky. Banks have seen the CFPB oversight of non-banks as “a way to level the playing field,” said Kaplinksy, since the agency imposed regulations on the growing non-bank sector.


Many in the financial services industry would like to see the CFPB brought down a few notches, and the Treasury’s conclusion that the CFPB’s mandate is “unduly broad, ill-defined, and susceptible to abuse” will win support from bankers. But much of what remains of the Treasury study goes over the familiar ground of the legal challenge that mortgage lender PHH took when it sued the agency on constitutional grounds. The case involves what the plaintiffs see as an egregious overstep by the agency’s director, who overruled the agency staff, which had decided PHH should pay $6.4 million for alleged kickbacks on mortgage insurance. Cordray decided a far higher $109 million penalty was appropriate.

The Treasury report makes the same argument as PHH— that the CFPB’s power is unchecked by any board, and places excessive compliance burdens on banks. Its independent structure allows it to decide unilaterally what rules banks must follow and “its unaccountable structure and broad, unchecked regulatory power is unprecedented.” But the Treasury does not follow PHH’s legal case to have the agency declared unconstitutional, and instead calls for reforms to curb its power.


The Trump administration remains committed to getting rid of the single directorship, and its present director. “Getting rid of Cordray would do much of what they want,” said Hawthorne. “It’s one of the most effective ways to slow down rule making and enforcement. Enforcement is based on who is running agencies. The tone is set at the top.”

Broader curbs will have to wait, say analysts and experts. “It is becoming more likely that it will take the form of multiple smaller bills targeting relief for specific segments of the financial sector as opposed to a single, comprehensive bill,” said Fitch Ratings report.

In the bigger picture, the difficulty of waging a battle in Congress to eliminate a politically protected agency is unlikely to gain much backing or momentum at a time when the administration is struggling with every part of its agenda.

“The Trump administration has bigger fish to fry,” said Kaplinksy. “In the great scheme this is really quite minor.”

-- U.S. Treasury report:here

-- Fitch ratings report:here

(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)