The Inside Story of the Consumer Financial Protection Bureau - Case Study Example

Due to the financial crisis in 2007–2010, there appeared a need in changes in the regulatory system in the U.S. Proposed in 2009 by the President Obama, the proposition included main components that consolidated the agencies’ regulatory, regulated the financial markets, developed consumer protection reforms through implementation of the new agency for consumer protection and others. The following paper will discuss the Consumer Financial Protection Bureau, the independent agency created by the U.S. government for consumer protection in the financial section. It will illustrate the historical supposition of the Bureau creation, its main duties and responsibilities, the purpose for the Bureau, and the analysis of its operation. Historical supposition of the CFPB First, it is worth saying that a new consumer financial protection agency, the Consumer Financial Protection Bureau, was created to protect Americans’ personal finance transactions. It may seem that the creation of Bureau was a result of Congress's effort to reorganize the industry of banking thus preventing the possible economic crises in the future. In the article “Consumer agency will clarify financial products' costs, terms” the interviewer and the advocate for creating the agency Elizabeth Warren, a Harvard law professor and chairwoman of the Congressional Oversight Panel, explained that the new Bureau would give a chance to American families  to obtain financial security. First published in 2007 in the Democracy Journal, the idea of creating the new bureau described a feisty “Financial Product Safety Commission” whose agents would be known further to the Americans as firefighters (DePillis, 2011). The creation of the Bureau was called to rule governing consumer financial services and products that included mortgages and credit cards; it was also called to make loan terms and costs more transparent for the Americans. The agency would made credit cards and mortgages easy to follow, avoiding the fine print blurring of risk and cost. The agency was called to make the market more competitive; however, it was not aimed to facilitate the consumers in their purchase responsibilities and to make decisions on money (Mantell, 2010). Elizabeth Warren did not call the agency a “nanny”, but the force that will allow the market work again and will bring the transparency. In certain period, such transparency will allow penalty fees and charges to go down and credit products to become cheaper. The agency will measure the risk in the financial system, however, it will not ensure the prevention of a financial meltdown, but it will ensure the raw materials put into the system would be clean products and the customers would understand them and have high repaying probability. To prevent the future economic disasters, the creation of the consumer agency could play an important role. The creators of the agency saw it as the one that will allow products to become simple so that consumers could read and compare them. The idea of saving bank bailouts and the financial firms, that earned record profits, were not welcomed by the usual consumers and many hoped the Wall Street reform would protect them and not just govern businesses. In 2010, the U.S. Senate approved the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010 (Lee, 2014). The reform gave the right to Congress to disband the corrupt banks and financial organizations, remove possessory trading and stop bailing out banks practice (Lee, 2014). It represented the broadest financial restrictions since the Great Depression. However, such idea wasn’t applied to some industries, like the automotive for example, and the new law was created, which further was called the Bureau of Consumer Financial Protection. The bureau, that was not new, gathered consumer protection responsibilities from some existed organizations, such as the Federal Trade Commission. When the transition was complete, the office was able to govern a wide range of services, stating from online banking and ending the high-interest payday loans. The Bureau of Consumer Financial Protection would operate under the protection of the Federal Reserve and had to be developed completely by the end of year 2011. It would lay down rules and regulations for financial services businesses that were provided to consumers, control such financial products as deposits, loan services, credit extensions, leases for property and shopping, settlements of real estate, cashing and online banking, services of financial advisory and financial and credit  reports. The aim of Congress was to enlighten consumers about the influence of any financial decisions or shopping that consumers made. Such transparency could initiate the exclusion of penalty fees and charges. Consumers were aware of such practices and were able to look for a better deal driving the prices down. Additionally, consumers would be able to compare information about the product, select what they needed and wanted and refuse from those they did not like. The Bureau will enable to educate consumers about the best financial decisions they may make, though still be responsible for own actions and their consequences. The first challenge of the Bureau work was in adding people as quickly as it could work properly. Like any startup, at the beginning the Bureau had certain ways to find its employees. There were opportunities to hire from outside, from the private sector or nonprofits; there were people ready to be transferred from other government agencies, from the Federal Trade Commission, for instance. However, such way was not used and created further discontent or legal action. The history knows three former bank examiners that sued for age discrimination because their applications were rejected. The founder of the Bureau explained such decisions as the want to bring new staff and train them accordingly so to follow the law.  Dodd and Frank joined all the functions of consumer protection inside the Bureau, some employees were taken from the department of Housing and Urban Development, and some were transferred. The hard-charging executives brought personnel from government bureaucracies and many rule-writing team members were brought from the Federal Reserve. They were familiarized with the orderly environment; small groups composed rules and sent them further for approval (DePillis, 2011). The purpose for the Bureau One of the main purposes of the CFPB is to inspect consumer financial services companies, big depository organizations and the affiliates to ensure consumer protection in the Federal Reserve System. It implements and enforces where necessary the Federal consumer financial law providing the consumers with an access to the markets for financial products and services in a mandatory manner. It also establishes fairness, transparentness and competitiveness for the consumers’ financial services and products in the markets. The CFPB gathered different issues of consumer compliant rules from the different federal agencies such as from the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the National Credit Union Administration, the Federal Trade Commission and the Department of Housing and Urban Development. The Bureau performs its authorities under the federal consumer financial law providing consumers with accurate and understandable information to enable them to make decisions about their financial transactions. Under the Bureau, the consumers are protected from deceptive and unfair acts and practices and from acts of discrimination. The Bureau identifies the outdated and the unnecessary burdensome regulations and address them to reduce burdens. Federal consumer financial law is executed in a mandatory manner, notwithstanding the status of a depository institution thus to encourage fair competition. The Bureau supervises the markets of financial products and services to operate them in a clear manner and effectively, to relieve access and innovation. Among the main functions of the Bureau are to hold financial education programs, respond to consumer applications, collect, research and monitor information that is relevant to the functioning of markets for the financial products and services. The work of Bureau is concentrated on the identification of risks for consumers and the proper operating of such markets. If there appear Federal consumer financial law breaches, the Bureau is able to cover consumers with appropriate enforcement action to solve issue rules. The new agency also provides support activities to the consumers. The Bureau selects non-depository financial services companies to identify potential risk that companies can pose to consumers, such are the company's asset size, quantity of financial transactions that consumers do, level of neglect and any other factor that the Bureau considers relevant. The Bureau coordinates the contemplation of non-depository financial services companies with governmental and prudential regulators (Dunn, 2013). The duties and responsibilities assigned to the CFPB One of the main duties of the new agency is to conduct reviews.  Target reviews are conducted to focus on a single problem at a single unit, for example a significant quantity of complaints that the customers make. The target review may be a specific concern that the Bureau paid attention.  Horizontal reviews are aimed to focus on the multiple entities to find out the issues that arise from the specific products or practices in order to establish the supervisory measures or enforcement actions that are needed. The Bureau uses many different approaches to control the depository institutions in comparison with the non-depository financial services companies. The Bureau performs its duties regarding any person that is engaged in providing or offering financial product or service for consumers. Such financial product or service for consumer is offered or ensured for consumers’ use, for personal or household intentions and are either delivered, offered or provided. These financial products and services may be the loan services or the extensions of credit, property appraisals and services connected to real estate, transmitting or exchanging funds and taking deposits, the one that acts as the custodian. Such custodian may use financial instruments represented on behalf of a consumer. Other financial products are sale, securing or edition of a payment instrument, cashing, collection, financial data processing and advisory services. The agency owns authority over big depository organizations, their affiliates and subsidiaries. The Bureau is also accredited to inspect some unities and individuals that provide financial products or services to the consumer under the section 1024.  The given section is applied to those institutions and individuals that propose or give mortgage-related services and products, ensure private student loans, provide participants with financial service or product defined by the Bureau rule. The agency Director has the power to appoint rules and issue orders as well as guidance to authorize the Bureau to manage federal consumer financial laws. In 2012, Richard Cordray was appointed by the President Obama as the first Bureau Director and the agency started its movement toward the regulatory policy and developing of rule-writing agenda, focusing on private mortgage lenders, money transfer agencies and credit bureaus. The Bureau web site collected more than hundred and thirty consumer complaints in period between July 2011 and February 2013. Additionally, the agency has also undertaken a vast data collection effort.  It asked banks and mortgage companies to ensure them with the consumer records. The agency has also created other resources for exchanging their best practices with financial products and services.  For example, the Bureau’s website has provided consumers with a page where they could leave positive and negative feedback on their experiences with certain consumer financial products in order to help the Bureau to improve its work and to protect consumers. The web site also included pages that directed consumers toward underserved communities, such as students, the senior citizenship, service members, and veterans. All this is possible under the "Get Assistance" link. Analysis of the Bureau operation The Financial Regulatory Reform Initiative’s Consumer Protection Task Force has realized their analysis and in-depth review of the work of Consumer Financial Protection Bureau during the one-year period. The requirement of the new agency was to provide consumers with the financial products and services and support the markets for those products and services to be accurate, clear and competitive. However, it appeared to be a complicated task to measure the effectiveness and success of consumer protection. Despite all challenges, it was important to determine the key metrics to gage progress and follow the course corrections if necessary. The mission of the agency was clear, however, the measurements to identify success were not. Therefore, the Task Force considered the overarching metrics for the Bureau performance should be created. They should be driven by taking into account the Bureau’s internal activities and the influence the agency makes on consumers and the financial marketplace. The Bureau, as any other regulatory agency, should perform the ability to use a balance of rule making, examination and enforcement to manage inherent and accurate financial protections for consumers. When producing independent guidance, the Task Force recommended the agency to search greater enclosure from a different group of interested parties, from both consumer groups and regulated institutions. After the CFPB work out its agenda, it will be important to improve financial outcomes for consumers by keeping in mind several downsides on the line of regulation. The important feature of the Bureau is that it should be well informed about the economics of consumer financial markets. As consumers of financial products can be different, regulators should be aware of laying on the one size that fits all the solutions. Regulation should search and encourage the financial innovation. There is a gap in the market for retirement savings products, for instance, as actual investment solutions need special mechanism for providing access to consumers to less-liquid asset classes that could make earn them an illiquidity premium. Economists have offered some new types of mortgages that may improve the products that already exist. The new Consumer Financial Protection Bureau should keep certain process taking into account new financial regulations. It should seek and identify specific problems. It should design and capture metrics for the success in order to address its problems. Such are the problems of fees that consumers pay for similar products, like index mutual funds. The metrics for success could include the enlargement of consumer awareness about the available low-cost options or a decrease in the level and the expansion of fees that ae paid by the consumers. The Bureau should tailor interventions to the problems at hand and evaluate potential and existing regulations in order to identify if interventions are actually provide the improvements in the metrics for success. References Campbell, J., Howell J., Madrian, J., Tufano, P., (2011). Consumer financial protection. Journal of Economic Perspectives 25(1): 91-114. Consumer Financial Protection Bureau, The official website of the United States Government, Retrieved from http://www.consumerfinance.gov/ DePillis, L., (2011). A watchdog grows up: The inside story of the Consumer Financial Protection Bureau, The Washington Post, Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/11/a-watchdog-grows-up-the-inside-story-of-the-consumer-financial-protection-bureau/ Dunn, G., (2013). The Consumer Financial Protection Bureau: Its Foundation, Authorities, and First Year of Enforcement, Retrieved from http://www.gibsondunn.com/publications/pages/ConsumerFinancial-ProtectionBureau-Foundation-Authorities-First-Year-of-Enforcement.aspx Lee, C., (2014). What's the Bureau of Consumer Financial Protection? Money & the Law, How Stuff Works, Retrieved from http://money.howstuffworks.com/bureau-of-consumer-financial-protection2.htm Mantell, R., (2010). Consumer agency will clarify financial products' costs, terms, MarketWatch, The Wall Street Joural, Retrieved from http://www.marketwatch.com/story/story/print?guid=552622E6-BC29-4771-ADC9-21F8E1109877 Read More