The future of the Consumer Financial Protection Bureau, perhaps best known for forcing big banks like Wells Fargo to return money to customers they cheated, will be tested Tuesday when the Supreme Court hears a case on the constitutionality of the agency’s structure.
The consumer bureau aims to protect Americans from shady practices sometimes used by credit card companies, payday lenders, student loan servicers, debt collectors and other financial institutions. It was created by Congress, as part of the Dodd-Frank Act, in the wake of the 2008 financial crisis – during which many Americans found themselves holding risky mortgages as their home prices plummeted.
At the time, the Obama administration was hoping to help prevent another future economic meltdown. It tapped Elizabeth Warren, then a Harvard law professor, to spearhead the initiative.
While many Americans might not be aware of what the agency does, it has become the cop on the beat, working behind the scenes to monitor the practices of lenders, debt collectors and credit rating agencies. Soon after its creation, the CFPB created new standards for the mortgage market. It also collects complaints from consumers and helps them get responses from companies.
“The financial system is complicated. After the financial crisis, it was obvious that there needed to be an agency focused on consumers that could supervise financial institutions at large,” said Vaishali Rao, a partner at Hinshaw Law who focuses on consumer financial services regulation and compliance.
There are several possible outcomes, depending on how the Supreme Court rules. It could decide that the President can fire the director without cause. It could go a step further and suggest that the bureau be run by a commission, rather than a single director. It’s possible the ruling could invalidate the bureau’s work entirely, but it could also leave the status quo in place.
Former CFPB director Richard Cordray told CNN last week that he thinks the court is likely to find the bureau’s structure unconstitutional – meaning it would allow the President to fire the director without cause.
But even if that’s the case, Cordray believes the agency is here to stay.
“I think it’s very unlikely the ruling will tear up or throw into question the work of the bureau,” he said.
The CFPB’s first public enforcement action was in 2012, when it ordered Capital One Bank to refund about $140 million to customers for pressuring them to pay for “add-on products” such as payment protection and credit monitoring when they activated their credit cards.
The CFPB exposed widespread fraud at Wells Fargo in 2016. The bank’s employees had secretly opened millions of fake bank and credit card accounts in customers’ names. The bank was ordered to pay money back to victims who were charged fees on those ghost accounts. The bureau worked with the Los Angeles city attorney, who had already sued the bank, using its nationwide jurisdiction to move the investigation along.
Then, in 2018, the CFPB hit Wells Fargo again with a $1 billion fine, levied in conjunction with the Office of the Comptroller of the Currency for forcing customers into car insurance and charging mortgage borrowers unfair fees.
The bureau’s practices have been attacked, especially by some Republicans who argue that it has too much power – and that it overlaps with other federal agencies like the Federal Trade Commission and the Office of the Comptroller of the Currency. Under Trump, it’s moved to roll back some regulations on payday lenders and a ban on forced arbitration clauses.
Currently, the bureau’s director serves a five-year term. Cordray, who was appointed by President Barack Obama, battled endless calls for his firing after President Donald Trump took office in 2017. He remained at the helm until November of that year, stepping down several months before his term was set to end. In the interim, Trump appointed Mick Mulvaney, who as a member of Congress pushed to abolish the agency. The current director, Kathy Kraninger, was confirmed in 2018.
If the court rules that the President has the power to remove the CFPB’s director without cause, it may not have any impact in the short-term – but could make the bureau more political, said National Consumer Law Center Associate Director Lauren Saunders.
“We don’t expect Trump to fire Kraninger. He appointed her,” she said, but added “our consumer protection work shouldn’t be based on who has the ear of the President.”