Four Years In, Courts Address CFPB's Constitutionality

A considerable legal battle is underway that could determine the fate of The Consumer Finance Protection Bureau (CFPB). The CFPB was created four years ago as part of the Dodd-Frank banking reform act. To its proponents, it is a government agency with the mandate to protect consumers with unprecedented authority. Its detractors have criticized it for its inefficiency, mismanagement, and unchecked authority. As the agency celebrates its fourth anniversary, a unanimous three-judge panel of the U.S. Court of Appeals ruled that the Texas bank bringing suit against the bureau has legal standing to challenge provisions of the bureau's constitutionality, despite not being a direct subject of CFPB enforcement action.

As it stands, the CFPB's authority is structured in such a way that it is able to operate less unaccountable to the President and to Congress than most government agencies. As a result of a number of rules that were part of the legislation that created the CFPB, the bureau is now regulating more and more of our economy..

For instance, take the CFPB's work on mortgages and credit cards. As the CFPB tightened regulations on traditional lenders to prevent the oft-decried "predatory lending," consumers with low credit scores found themselves shut out from traditional credit options, especially credit for short-term emergencies. The CFPB's recently released rules targeting payday lenders, with the result of making it even more difficult for consumers with bad credit to access cash.

In its rush to label and end "payday debt traps," the CFPB limited the interest rates traditional lenders can charge, while also limiting borrower's access to these loans. If the CFPB continues its campaign against payday lenders, many of these companies will be out of business. From a process perspective, this interferes with the states' rights to regulate financial businesses. From a policy perspective, it leaves consumers with fewer viable emergency lending options.

While payday loans aren't an ideal option for consumers (please, avoid them if you can), they do offer a much-needed short-term solution for people with bad or no credit who do not qualify for loans at traditional banking and lending institutions. Ironically, these efforts to regulate the mortgage and credit card industry have now created an even bigger market for payday lending - an unfortunate unintended consequence of well-intentioned regulation.

A recent survey by the Federal Reserve found that two-thirds of Americans making less than $40,000 annually have no real cash reserve or access to enough credit to handle a $400.00 spending emergency. The survey revealed that two-thirds of Americans say they would have to sell something or borrow money to make it through a $400.00 emergency expense. About 12 million Americans take out payday loans each year, according to CFPB data, and it's not clear that they are doing so frivolously. In reality, there is a real need for a non-traditional lending tool such as payday lending.

Efforts to shut down payday lending will ultimately deprive access to a much-needed avenue of credit for the most financially vulnerable consumers and could easily push those who are struggling the most to back room lenders and loan sharks who completely ignore the law. We need sensible state laws to help consumers utilize lending options wisely, which is not what the CFPB offers in their most recent ruling.

Consumer protection is tricky, and technology has made incredible bounds in protecting consumers. At the same time, we've had more regulation at a time it often seems we need it least. The CFPB may have the best intentions in the world of protecting consumers from lenders it considers predatory, but history often punishes the hubris of those who imagine they know how their regulation will work with unintended consequences that outweigh the gains of regulation. Additionally, accountability is an integral part of our system of democracy and regulatory governance. If government agencies are held too closely or too loosely accountable for their actions, the regulatory feedback loop with the electorate (i.e. consumers) has the potential to break down.