The Consumer Financial Protection Bureau: A Toxic Workplace Begets Toxic Policies For Consumers


By Adam Smith and Todd Zywicki

recent report conducted through internal investigation at the Consumer Financial Protection Bureau (CFPB) found multiple instances of employee discrimination and harassment. Investigator Misty Raucci claimed, “I found that the general environment in Consumer Response is one of exclusion, retaliation, discrimination, nepotism, demoralization, devaluation, and other offensive working conditions which constitute a toxic workplace for many of its employees.”

Oh if a toxic workplace was the extent of the problem with the CFPB. But apparently this just shows things are as bad on the inside as the “toxic” policies being thrust upon the market on the outside. Be it a shrinking mortgage market, reduced access to credit card services, or the forced removal of much of the auto lending trade, the CFPB has certainly made its mark in waging war on consumers

So just how did this agency become capable of spewing toxic policies from an apparently toxic work environment? The Consumer Financial Protection Bureau was established as part of the Dodd-Frank Financial Reform legislation. Premised on the notion that undue influence by Wall Street corrupted public officials in the years preceding the crash, the agency is vested with unprecedented power and independence from public oversight by Congress, the President, or anyone else. Virtually all of the typical levers of control over governmental bureaucracies are absent. It is structured as a bureau within the Federal Reserve, but its rulemaking and litigation are not accountable in anyway to the Federal Reserve Board.

Furthermore, rather than being headed by a bipartisan commission (as is the Federal Trade Commission), the CFPB is headed by a single director. And while it is not uncommon for federal departments to be headed by a single person, such as a cabinet secretary, the director of the CFPB cannot be fired by the President, but serves a five-year term and is removable only for cause, such as malfeasance or dereliction of duty. At the same time, the bureau has the power to regulate virtually every term of every consumer credit product in America.

Apologists for this novel agency structure, such as the bureau’s Godmother and now-Senator Elizabeth Warren of Massachusetts, contend that its extreme independence from external controls (such as congressional appropriations oversight) or internal controls (a bipartisan commission structure) are necessary to avoid the distorting effects of special interest pressures.

But political scientists have also identified a number of pathologies to which bureaucracies succumb when set adrift without sufficient public accountability: a tendency toward imperialistically expanding their reach and a tunnel vision focus that ignores the full cost of their regulations on the economy.

So who is right about what happens when bureaucrats are left to their own devices? Has the CFPB used its extraordinary lack of accountability to promote the interests of American consumers—or its own interests?

So far, the evidence as presented in our new Mercatus Center study supports the latter hypothesis. The agency has produced a number of policies which, while benefiting itself by expanding its regulatory footprint, provide little benefit to consumers—and in some cases are even likely harmful to those it purports to be helping.

Consider, for example, CFPB’s assault on automobile financing by car dealers. Although CFPB’s jurisdiction is vast, Dodd-Frank explicitly prohibits CFPB from regulating lending by auto dealers. Yet even this small limit on its reach proved unpalatable to CFPB’s voracious appetite for power: using the cudgel of fair lending laws, the CFPB has informed banks (which supply the financing offered to consumers by the dealers) that they will be held responsible for any perceived disparate impact in lending patterns by the dealers, essentially deputizing banks as private arms of the federal law-enforcement machinery, enabling the CFPB to essentially evade Congress’s explicit limit on its reach. The CFPB’s probe has triggered bipartisan calls from Capitol Hill, including many Democrats from minority-heavy districts, demanding clarification on the CFPB’s methodology and basis for its claims. This fall Senator Warren called for an end to the auto dealers exception to the CFPB’s jurisdiction—but notably raised no objection to the CFPB’s clear evasion of existing congressional limits on its power.

Another tendency of isolated bureaucracies is to ignore the full cost of their regulations, especially the costs imposed on the private sector. Consider the bureau’s “Qualified Mortgage” rules (frequently called the “QM rule”), which seeks to establish rules for “safe” mortgage lending based on the borrower’s ability to pay. As previously observed, because the rules do nothing to address the real deterioration of lending standards that drove the housing crash (the deterioration of down-payment requirements), the QM rule’s underwriting standards would have done little to stem the housing crash. But although the benefits of the QM rule are small, the costs are real. For example, Frank Spencer, president of North Carolina’s Habitat for Humanity chapter recently testified to Congress that the costs of complying with QM’s regulations has cost almost $50,000 in labor and technology over the past year—roughly the equivalent of the $70,000 that it costs the organization to build one house for a needy family.

A further wrinkle presents itself when we consider just how the CFPB justifies its intervention. Using behavioral economics, the agency largely assumes that consumers cannot make decisions for themselves and so must be coddled by sympathetic bureaucrats. For some reason, we don’t think this is what Adam Smith had in mind when extoling the virtues of our moral sentiments and our predilection toward sympathy with others.

More to the point, the agency largely believes consumers should value financial products the same way bureaucrats do. Even when evidence shows that consumers are evaluating products correctly, the agency simply doubles down by ignoring such bothersome counter-evidence. Furthermore, the agency prefers where possible to use heavy-handed approaches that jeopardize large chunks of the consumer market, as opposed to the softer “nudge” policies expounded by behavioral theorists. So much for academic policy prescription by would-be philosopher kings!

Each of these stories, whether seemingly mundane self-dealing or regulatory imperialism and dismissing the costs of its regulations, point to a common denominator: an out-of-control agency, drunk on its own power and insufficiently attentive to the impact its mandates are having on the consumers that it claims to represent. It seems that it is the interests of the agency itself, not the consumers it claims to represent, that is animating its toxic decisions.

Adam C. Smith is an assistant professor of economics and director of the Center for Free Market Studies at Johnson & Wales University. Todd Zywicki is George Mason University Foundation Professor of Law at George Mason University School of Law and Senior Scholar at the University’s Mercatus Center. He is advising Morgan Drexen, Inc., in a challenge to the constitutionality of the Consumer Financial Protection Bureau.



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