makada henry-nickie, formerly a senior analyst at the Consumer Financial Protection Bureau, is a fellow in governance studies at the Brookings Institution.
Illustrated by david vogin
Published January 24, 2021
The first order of business for the new president will be gaining control over the pandemic and providing purchasing power for households, small businesses, local governments and health care systems dislocated by the crisis. But that, of course, is only the beginning of restoring good government.
Agencies ranging from the Environmental Protection Agency to the National Labor Relations Board, which have been weakened — or gutted — over the past four years, need to be reconstructed, even as we claw our way back from Covid-19. Here, I offer the tale of the rise and fall (and, I hope, rebirth) of one such institution, the Consumer Financial Protection Bureau, an Obama-era startup with a critical mission that has barely survived the Trump era.
Past as Prologue
The current state of play in credit markets eerily resembles the tumultuous period around the collapse of the subprime mortgage market in 2008. Before the bust, a combination of cheap accessible credit, relaxed bank regulation and what John Maynard Keynes called animal spirits fueled a housing bubble. Once the exuberance crested, Wall Street left Main Street to fend for itself.
Millions of ordinary Americans struggled under the weight of double-digit unemployment and mortgage payments far above their means. The crisis fallout was a clarion call to reverse the long trend toward deregulation – in particular, the lax oversight of lending to inexperienced homebuyers that helped to destroy the financial stability of broad swaths of the population.
Democrats, led by Rep. Barney Frank, Sen. Chris Dodd and Elizabeth Warren, argued that the financial services industry’s success in shedding prudential regulation over the previous few decades had allowed the industry to amass record levels of debt of dubious quality without adequate capital to buffer against a collapse.
In addition to pointing fingers at the industry and its tireless lobbyists, many analysts blamed the U.S. Treasury’s Office of Thrift Supervision (OTS) for the boom and bust, painting the regulator as a key enabler of bad judgment and outright misconduct. Among other lapses, they pointed out, overlapping regulatory turf gave lenders the freedom to “charter shop” for the most lenient regulator – which proved to be the OTS.
Many commentators blamed the Office of Thrift Supervision (OTS) for the meltdown, painting the prudential agency as a key enabler of financial institutions’ misconduct.
Actually, the regulatory structure was even more biased toward dysfunction than casual observers understood. According to a 2019 Federal Reserve Bank of Richmond report, the fact that the OTS was primarily funded by fees paid by the banks it supervised gave the agency potent incentives to adopt an accommodating stance, the better to keep “customers” and lure new ones from less agreeable regulators.
Indeed, in 2007, Countrywide Financial, soon to become notorious as the symbol of imprudent mortgage lending, switched to an OTS charter. Under OTS supervision, Countrywide received approval to “modify terms on problem loans and thereby delay loan foreclosures,” deliberately misleading investors about the institution’s financial condition. And Countrywide was not the only big player to benefit from the “pay-to-regulate” regime; according to the Richmond Fed’s report, several other large financial institutions, including Washington Mutual and the American Insurance Group, enjoyed similar accommodation.
Warren’s Consumer Protection Manifesto
After the establishment of the Troubled Asset Relief Program in 2008 to backstop Wall Street, Elizabeth Warren, then an advisor to Congressional Democrats, pressed the newly elected president for measures to stop the predatory lending practices that had lured millions into unaffordable mortgages. Warren made an impassioned case for a new regulatory agency that would protect consumers, arguing that “financial products should be subject to the same routine safety screening that … governs the sale of every toaster, washing machine and child’s car seat.”
In a 2009 report, the U.S. Government Accountability Office echoed Warren’s concerns, noting that consumers were exposed to increasingly complicated financial products in which the risks were disguised by dense, unreadable disclosures. “Consumer protection,” the GAO concluded, “should be viewed from the perspective of the consumer rather than through the various and sometimes divergent perspectives of the multitude of federal regulators that currently have responsibilities in this area.”
Riding a wave of public outrage in 2010, Warren got her way in Congress. President Obama signed the Consumer Financial Protection Bureau Wall Street Reform Act, memorializing the CFPB under Title X of the broader Dodd-Frank Act.
Dodd-Frank carved out a regulatory domain for the bureau, consolidating what had been to that point a highly fractured consumer financial protection framework. The new law transferred the consumer protection functions of the OTS as well as those of the Federal Reserve, the FDIC (the bank deposit insurer), the Comptroller of the Currency and the National Credit Union Administration (the credit union insurer) to the newly minted agency.
With hindsight, it was clear that pay-toregulate had left the OTS susceptible to what economists called regulatory capture by the regulated and had weakened its will to respond to risks that threatened the stability of the whole financial system. Congress, acknowledging the risk of a similar capture, created an unusually independent agency that, like the Federal Reserve, would not depend on Congressional appropriations and that would be led by a single director with a fiveyear term who could be removed only for cause.
The Startup at War
Not surprisingly, the Wall Street empire fought back. The bureau’s formative years were marked by political infighting and intense industry lobbying. Republicans united to thwart Senate confirmation of President Obama’s pick to lead the CFPB. In a maneuver later echoed multiple times by the Trump administration in other contexts, Obama used an obscure rule to install Richard Cordray, formerly the attorney general of Ohio, as the bureau’s first director during a Congressional recess.
Cordray hit the ground running. Much to the chagrin of the industry and Congressional Republicans (not to mention some second thoughts on the part of industry-friendly Democrats), Cordray molded the CFPB into an aggressive pro-consumer agency. In its first two years, the CFPB promulgated a dizzying number of rules across an expansive agenda. It issued new mortgage servicing regulations and new rules to bring previously unregulated bank-like financial institutions under its purview. The agency also set out final rules for the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act that gave both badly needed teeth.
Meanwhile, the bureau developed a reputation for zealous enforcement. In its first action, the CFPB extracted $210 million from Capital One Bank for deceptive marketing practices, alleging that the bank violated the law when it targeted borrowers for add-on products, including payment protection plans. Then, in a series of follow-on actions, each packaged with unprecedently high financial penalties, Cordray put the industry on notice that he was very, very serious about his mission.
Cordray’s Icarus Complex
By the close of 2013, Cordray’s CFPB had accumulated a long list of enemies. And when he announced a $98 million enforcement action against Ally Bank (formerly General Motor’s credit arm), that list grew to include the powerful auto-lending lobby. The CFPB alleged that Ally greenlighted dealership discrimination against minority borrowers in violation of the Equal Credit and Opportunity Act.
Cordray was clear that he intended to “eliminate dealer markups [on auto loan originations] altogether” and to implement “a new compliance framework.” Policing racial and ethnic discrimination was a familiar and widely approved mission of federal regulators. But price controls were another matter. Unsurprisingly, the National Automobile Dealers Association pushed back hard, asserting in a report to the House Financial Services Committee that the bureau had no legal authority to force the industry to adopt its “global solution.”
Undeterred, Cordray continued to test the agency’s statutory limits. In mid-2015 he broke new ground, imposing a $109 million penalty against PHH, a mortgage servicing company, alleging that it had received kickbacks from mortgage insurers in violation of RESPA, the real estate settlement law. Cordray’s interpretation of RESPA was at odds with both federal court and longstanding regulatory precedents.
Lest anyone doubt he meant business, the director even applied the penalty retroactively, ballooning the levy to the aforementioned figure. Actually, Cordray went even further, applying his penalty formula to transactions that predated the bureau’s creation — in some cases by several years. He soundly rejected regulatory tradition that provided clear safe harbors for covered RESPA transactions and abandoned the prevailing threeyear limit on liability. Cordray’s expansive interpretation of his authority concerned even bureau allies and, more generally, fed fears about his unconstrained autonomy.
Dismantling the CFPB
Not surprisingly, the CFPB’s relentless enforcement unified and mobilized the agency’s adversaries. And with the election of Donald Trump, they got the friend they needed in the White House. President Trump wasted no time in replacing Cordray (who resigned) with Mick Mulvaney, a former hard-right member of Congress and Trump’s chief of staff who made no secret of his free-market fundamentalism.
Now the fox was firmly ensconced in the chicken coop. Mulvaney publicly lambasted the CFPB as a “wonderful example of how bureaucracy will function if it has no accountability. … It turns up being a joke. … That’s what the CFPB really has been in a sick, sad kind of way.”
Mulvaney matched his predecessor’s enterprise in both speed and scope. Under the supervision of strategically selected political appointees, the bureau quickly lost its will to regulate. In a June 2017 report to the president, Treasury Secretary Steven Mnuchin laid out a roadmap for a rollback of financial regulation, including an initiative to rein in the CFPB’s unprecedented “unaccountable structure and broad, unchecked regulatory power.” Mulvaney redoubled his efforts.
By three months into his appointment, Mulvaney had effectively reversed half a decade of consumer protection initiatives. He declined to request cash from the Federal Reserve to fund the bureau’s operations (as noted above, a privilege designed to shield the CFPB from Congressional second-guessing), temporarily suspended the bureau’s enforcement actions, and refused to pursue an investigation into a data breach at Equifax, the giant credit rating firm, that exposed the personal data of 143 million consumers.
He also rolled back the bureau’s payday lending rule, angering consumer groups that criticized his cozy relationship with the payday loan industry as an egregious conflict of interest.
Actually, Mulvaney more than matched Cordray on the audacity scale. Tossing aside the bureau’s statutory mission, he defanged the Office of Fair Lending and Equal Opportunity, moving the division to the Office of the Director and stripping its authority to police credit discrimination. The once-potent fair lending office was converted into a demure consumer education subdivision that he would supervise directly.
Mulvaney’s assault on the CFPB culminated with his report to Congress requesting that his agency’s funding be routed through the appropriations process, that Congress impose oversight on its rule-making, and that the White House be given authority to replace the director at will. Near the end of his tenure, Mulvaney fired the bureau’s venerable Consumer Advisory Board, successfully bending the regulatory arc backward in time. Indeed, at that point, the CFPB closely resembled the defunct industry-accommodating OTS. The Bureau of Consumer Financial Protection, like the OTS, prioritized the welfare of the financial services industry over consumers’ interests.
Mulvaney’s rhetorical mantle and decisive prior legislative record targeted toward abolishing the CFPB was a perfect fit for President Trump’s deregulation agenda.
Normalizing Bizarro World
The bureau entered 2019 under the leadership of a new Senate-confirmed director, Kathy Kraninger. Because Kraninger, a former associate director of the White House Office of Management and Budget, had no expertise in regulating consumer finance, her permanent appointment did nothing to instill confidence on the part of Democrats or consumer groups. Indeed, Kraninger’s remarks at her confirmation hearing suggested that she shared Mulvaney’s hostility to the bureau’s mission as laid out in the original legislation.
Kraninger has since insisted that she is not Mulvaney’s (or the financial services industry’s) lapdog. However, her track record says otherwise. In her first major decision as director, Kraninger rescinded a critical provision of the Cordray-era payday lending rule, citing “insufficient evidence and legal support” for the requirement.
But John Lanning, a former CFPB research economist intimately involved in the rule recall scheme, raised serious concerns about manipulation of the data cited to justify the rollback. According to The New York Times, Lanning detailed the bureau’s reliance on the flawed judgment of a political appointee, who by Lanning’s account “was incapable of accessing data or using statistical programs that are commonly used by anyone trained in empirical economics.”
Kraninger’s subsequent unilateral decision to discontinue the bureau’s oversight of the Military Lending Act (MLA), which was created to protect military households from predatory lenders, further narrowed any distinction claimed between the policies of Mulvaney and Kraninger. Unlike her predecessor who surreptitiously shelved all MLA supervisory activities, Kraninger very publicly defended her hands-off approach under the novel theory that the bureau lacked explicit jurisdictional authority to enforce MLA compliance. On another front, Kraninger’s proposed revisions of the rules implementing the Home Mortgage Disclosure Act was (predictably) deferential to the industry.
To be fair, Kraninger did try to put some daylight between herself and the free market fundamentalists in ascendance within the Republican Party. For example, she has resisted efforts to look the other way on complaints about abuses in student loan servicing. And in her semiannual report to Congress, she cited enforcement efforts against the Freedom Mortgage Corporation for mortgage loan data errors and a redlining complaint referral to the Department of Justice.
But all told, the picture is rather bleak from the consumer perspective. To paraphrase Barack Obama speaking in another context, a pig wearing lipstick is still a pig.
Restoring the Consumer Watchdog
The Biden administration will surely wish to bring back much of what has been lost at the CFPB. But a cool look suggests that the agency has sustained significant damage that cannot be repaired overnight. A mix of executive action and legislation will be needed to rebuild the watchdog’s institutional posture and armor it against ideological opposition and the muscle of the financial industry.
A critical first step is the choice of a new director with the requisite vision — and the political skills to run the gauntlet of lobbyists and ideologues. Fortunately, the Supreme Court ruled earlier this summer that the president has the authority to remove the current director “at will.” So Kraninger will not be able to cling to the job for the full five-year term.
Importantly, the ruling effectively puts a kibosh on future challenges to the bureau’s constitutionality, a tactic that the industry — notably, the aforementioned PHH Mortgage Corporation — frequently invoked to impede CFPB enforcement demands.
The new director will have the authority to reinstate the CFPB’s rule-making process and reshape Cordray-era bureau rules. One particular priority: making the regulations more sensitive to the vulnerabilities of people of color who have been badly injured in the past year by the ravages of the pandemic, the subsequent recession and, of course, heightened racial conflict.
While a new director must eventually be confirmed by the Senate, an interim director could reassert the independence of the Office of Fair Lending and confirm its enforcement authority. Furthermore, the interim director could use his or her authority to resume the bureau’s oversight of the MLA and to rescind Kraninger’s broad industry guidance found in a series of industry-cozy bulletins.
But, however welcome, a return to the Obama days would not be sufficient. The new visibility of the legitimate grievances of people of color suggests the need for outside-thebox ideas to address longstanding structural inequities created by racial bias in federal programs. One possibility: a public credit rating agency, operating side by side with the private credit rating agencies, that is truly race-blind.
Another arena that should be of intense interest to the CFPB is the greatly expanded use of artificial intelligence in loan underwriting, which promises both lower underwriting costs and less chance of overt bias. Yet, while machine learning does offer great potential in expanding fair access to credit, one should not ignore the risks of unintentionally encoding bias into the complex algorithms that make online underwriting practical. Remember, too, that while the CFPB has the authority to regulate automated underwriting, it does not yet have the expertise.
Mulvaney’s turbulent leadership had a deeply destabilizing impact on the bureau’s career civil servants. And employee morale has continued to erode unabated during Kraninger’s tenure. The bureau has been steadily losing its best and brightest. Rebuilding a resilient CFPB thus will depend heavily on the director’s ability to recruit and inspire a diverse, talented workforce.
The unspoken questions with the CFPB — questions that apply in one way or another to much of the legacy of the Trump years – is how well-conceived institutions with missions that enjoyed popular support proved so fragile in the face of ideological and interestgroup opposition. And while Cordray did put the CFPB at risk by stretching his mandate, I am puzzled (and shaken) by the ease with which it was obliterated.
Perhaps the most relevant questions now for the CFPB are how to build (and sell) an agenda that will advance its mandated mission of protecting consumers – particularly, lowincome consumers and consumers of color – in ways that will survive in a divided government. The next director will have their work cut out for them, as will the White House, which must protect the battered agency from private and public opponents who won’t go gentle into the good night.