Scaling back the Consumer Financial Protection Bureau, which is squarely in the crosshairs of President Donald Trump's administration, will lead to reduced oversight of big banks and financial technology companies, and has raised concerns that unsavory practices will become more commonplace, potentially harming the industry's reputation.
The CFPB often targeted practices at the biggest banks during the Biden administration, moves that were considered messages to the wider marketplace to stop behavior that is potentially harmful to consumers. The CFPB also took action against financial technology companies, and other tech players like Apple Inc.
Those efforts have come to a halt as Acting Director Russell Vought paused all supervisory activities, with more drastic moves expected. Trump aims to eliminate the CFPB, which he said "was set up to destroy people," when making remarks to reporters Feb. 10 from the Oval Office. Elon Musk, Trump's appointed lead of the Department of Government Efficiency, posted a message Feb. 7 on his social media platform X that said "CFPB RIP."
Going too far?
A limited CFPB can blunt the impact of an agency that has drawn criticism from the banking industry for being too far-reaching, but it will also limit regulation for its competitors such as fintechs, said Erin Bryan, partner and co-chair of Dorsey & Whitney LLP's Consumer Financial Services Group. Fintechs face far less oversight than banks and the CFPB helped level the regulatory playing field, Bryan said. A lack of enforcement of the CFPB's regulations could open the door for more players to enter financial services.
"There's a question of whether some entities might step into the void and offer products in a way that is not ultimately good for the industry," Bryan said in an interview. "That could result in actual real consumer harm that gives a black eye to the industry, which is not good for anybody."
The CFPB's supervisory authority applies to banks and credit unions with more than $10 billion in assets, and the idea of limiting its efforts raised concerns from a trade group that represents community banks.
"Any changes to consumer financial oversight must ensure that responsible financial institutions — particularly community banks — are not unduly burdened by regulations rightfully intended to ensure megabanks and nonbank actors don't push the system toward another crisis," Independent Community Bankers of America President and CEO Rebeca Romero Rainey said in a statement to S&P Global Market Intelligence.
Still, the agency often drew the ire of the banking industry when it was under the leadership of Rohit Chopra during the Biden administration. Banking trade groups have challenged in court the CFPB's rule limiting credit card late fees, which has been on hold while the case plays out. Industry trade groups also sued the CFPB over an overdraft rule. The CFPB's open banking rule is the subject of pending litigation.
Romero Rainey and Bryan each said questioning some of the CFPB's actions is warranted. Romero Rainey said the ICBA shares "concerns about the structure and operations of the CFPB," and Bryan said there are legitimate questions "about the politicized way that the CFPB has done its work."
"That doesn't mean that everything that it has done is unhelpful," Bryan said. "There are certainly aspects of the CFPB's existence and rulemaking authority that have become important to the way that industry functions."
For example, the CFPB publishes average prime offer rate tables, data the mortgage banking industry uses to demonstrate compliance with qualified mortgages, which have protections that aim to ensure borrowers can afford their loans. A root cause of the Great Financial Crisis was borrowers being granted mortgages that they ultimately could not pay back.
Uncertain future
The Great Financial Crisis triggered the establishment of the CFPB, which was mandated under the Dodd-Frank Act. Now, exactly how or whether the bureau will continue to function is anyone's guess. Two days after Trump said he aims to eliminate the agency, the president nominated former FDIC Board Director Jonathan McKernan for a five-year term to lead the CFPB.
Ed Mills, a managing director and Washington policy analyst at Raymond James & Associates, said the selection of someone with regulatory experience seems to run counter to Musk's "CFPB RIP" post. "While the CFPB is not dead yet, it is on life support — and McKernan, an experienced regulator, will likely be tasked with maintaining limited functions such as its consumer complaint functions and periodic examinations of $10B+ banks," Mills wrote in a Feb. 12 report.
Others made similar comments. Ian Katz, managing director at Capital Alpha Partners LLC, wrote in a Feb. 12 report that it seems acting Director Russell Vought will try to "shed employees and functions before turning the bureau over to McKernan," who is considered a mainstream Republican friendly to the industry.
Eamonn Moran, partner at Holland & Knight LLP and a former counsel in the CFPB's Office of Regulations, said he was pleasantly surprised to see the nomination, and it suggests that the period of upheaval is temporary. Moran added that the executive branch's say over CFPB could have its limits.
"Certainly the existing statutory authority that the CFPB has won't change unless there's an act of Congress," Moran said in an interview.
What's next
The Republican-led Congress has made some CFPB-related moves. House Financial Services Committee Chairman French Hill (R-Ark.) and Senate Banking, Housing and Urban Affairs Committee Chairman Tim Scott (R-SC) each introduced resolutions that would overturn the CFPB's rule capping overdraft fees, and they said laws are already in place that promote financial discipline and responsibility.
"The CFPB needs guardrails on its enforcement and rulemaking powers, and this rule is another clear example of why," Hill said in a Feb. 13 statement.
Sen. Ted Cruz (R-Texas) introduced a bill in January that would "zero out transfer payments" to the CFPB from the Federal Reserve, and a companion version of the bill was introduced in the House by Rep. Keith Self (R-Texas).
If the CFPB had no funding and went away, it would reduce the oversight of larger banks while small banks continue getting about the same. That would be "an unfortunate result," said David Silberman, a lawyer for the CFPB from 2010 to 2020, said in an interview.
State attorneys general would likely fill in some of the void created by the halt in CFPB activities, but Bryan said this could be disadvantageous for banks and other companies because, instead of dealing with one CFPB, they could end up fighting attorneys general from multiple states and facing "a patchwork of outcomes" based on different court decisions.
"That also is not an ideal outcome for anybody," Bryan said.
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