Abolishing the Consumer Financial Protection Bureau (CFPB) should rank high on the list as the Department of Government Efficiency (DOGE) seeks to cut reckless federal spending. This agency — created in the Wall Street Reform and Consumer Protection Act of 2010, known as Dodd-Frank, intended to address what many considered the causes of the 2008-09 financial crisis — has, in fact, harmed some Americans whom it was intended to benefit.

(Article by Jane L. Johnson republished from Mises.org)

How CFPB Came to Be

Congress considered the creation of a consumer financial watchdog agency as the economy was recovering after the 2008-09 financial crisis, with Senator Christopher Dodd (D-CT) and Congressman Barney Frank (D-MA) spearheading the effort. Having both served in Congress for many years, teaming up to enact major post-crisis legislation represented their final congressional achievements before retiring.

Never mind that the Federal Trade Commission (FTC) — established in 1914 — claimed to be “…the only federal agency that deals with consumer protection and competition issues in broad sectors of the economy.” The 2010 proposal to create a new consumer financial protector was a pet project of Senator Elizabeth Warren (D-MA) — then a professor at Harvard Law School — and she wanted to assure its inclusion in any post-crisis legislation.

Observers sensed that the major motivation behind her advocacy was her expectation of appointment as the initial director of what was to become known as the CFPB. But, when her nomination was imminent after President Obama signed the Dodd-Frank legislation, there ensued considerable public and congressional opposition to her appointment. She instead decided to declare her candidacy for an open US Senate seat, which she won and still occupies.

CFPB is a uniquely independent agency in two respects. First, it is organizationally housed within the Federal Reserve System (the Fed), from which it uniquely receives its funding. Second, by the terms of the original legislation, its director could not be dismissed by the President, except for cause (e.g., inefficiency, neglect, malfeasance). The US Supreme Court has ruled on both of these provisions.

The Court ruled 5-4 in 2020 in Seila Law LLC v. Consumer Financial Protection Bureau that Congress overstepped constitutional boundaries when it allowed the President to remove the CFPB director only for cause, and that the CFPB leadership structure violates the constitutional separation of powers. Thus, the Court ruled that the CFPB director must be accountable to — and removable at will by — the President. The Court ruled 7-2 in 2024 in CFPB v. Community Financial Services Association that funding CFPB through the Federal Reserve’s income instead of congressional appropriations is constitutional because appropriations need only identify the source of public funds and authorize their expenditure for a designated purpose in order to pass constitutional muster.

A Remaining CFPB Funding Glitch

Having resolved these constitutional issues, CFPB survived to continue protecting consumers’ financial wherewithal. A small snag remains with respect to its Federal Reserve funding, however — as Mises Institute Senior Fellow Alex Pollock has demonstrated — the Fed has been running an operating loss since September 2022, and thus, has no revenue from which to provide CFPB funding.

No one seems terribly concerned about this lack of Fed revenue, however, since the Fed has invented its own accounting rules that allow it to assign its annual operating losses to a “deferred asset” that will ride on its books until eventually the Fed will have positive revenues with which to pay off those deferred losses. This arrangement allows the Fed to continue paying its own operating expenses, paying interest on private depository institutions’ reserves on deposit with the Fed, and supporting CFPB at whatever levels the CFPB director deems necessary to fulfill its responsibilities in protecting consumers.

CFPB’s Efforts to Protect Consumers

CFPB has established an online complaint portal, through which consumers can connect with financial companies to understand issues, fix errors, and get direct responses about financial problems. Many of the complaints involve credit reporting agencies such as Experian, Equifax and Transunion, all of which are members of the Nationwide Credit Reporting Agencies (NCRAs). Complainants can receive financial settlements for confirmed credit reporting errors. A nationwide assessment has reported on CFPB’s effectiveness in assisting consumers with their credit report problems. What is not clear, however, is how much consumers themselves may contribute to their own credit rating difficulties.

Other major complaints received by CFPB include debt collection (facing a debt that a consumer doesn’t owe), mortgages (problems when a consumer is unable to pay), credit cards (billing disputes with credit card companies), and bank account or services (account management questions). Again, it appears that many of these problems may be attributed to consumers’ own behavior and lack of financial knowledge. It also appears that many consumers may simply need some hand-holding and advice to avoid further personal financial difficulties.

CFPB Wants to Repeal the Laws of Supply and Demand

Aside from CFPB’s assumed responsibility to assuage consumers’ anxiety about their financial welfare, the bureau recently announced a rule capping bank overdraft fees at $5, well below a countrywide average fee of $35 per incident. Anyone with a rudimentary knowledge of economics knows that price controls — price ceilings such as rent controls or price floors such as minimum wage laws — never work and typically harm those they are intended to benefit.

CFPB contends that overdrafts are effectively loans, and that fees can be interpreted as interest on loans rather than penalties for overdrawing a checking account. The rule is expected to save consumers as much as $5 billion in annual overdraft fee savings, or $225 per household that pays overdraft fees. What this rule may in fact cause, however, is more low-income Americans to be unbanked, turning to payday lenders. Banks are, moreover, likely to screen more carefully when establishing checking account applications.

CFPB also recently announced a rule banning excessive credit card late fees, lowering the typical fee from $32 to $8. The bureau claims that this rule will reduce fees that cost Americans over $14 billion a year, an average savings of $220 per year for the 45 million people who are charged late fees. Again, this provision can only restrict credit availability for those who need it.

One can foresee CFPB attempting to cap credit card finance charges (interest rates), which for good reason are always well above other loan rates. Some consumers are under the misunderstanding that credit cards are “plastic money,” when, in fact, these cards represent short-term consumer loans that accrue interest if balances are not paid within a certain period. Credit card finance charges are above interest rates on other loans such as mortgages and car loans because of the inherent lender risk in offering these consumer loans. While lower finance charges sound consumer-friendly, such a policy would predictably cause card issuers to deny more card applicants.

In early January 2025, CFPB warned that the US Department of Education (ED) can collect the outstanding balances of borrowers’ federal student loans through forced collections, including the offset of tax refunds and Social Security benefits. In 2025, these collections are set to resume after a covid pause, and nearly 5 million student loan borrowers with loans in default will again be subject to ED’s forced collections. Among the borrowers are an estimated 452,000 aged 62 and older with defaulted loans who are likely receiving Social Security benefits, potentially pushing older borrowers into poverty and undermining the purpose of the Social Security safety net.

While CFPB offers no immediate solution to this scenario, it portends contention between the bureau and Social Security Administration that may ultimately require congressional action or executive branch intervention. None of this presents a pretty picture looking ahead for CFPB and ED, or affected borrowers who are also Social Security beneficiaries.

How CFPB Could be Abolished

As a relatively new federal agency, CFPB could be easily abolished and its staff reassigned to other entities such as the Federal Trade Commission and the Federal Reserve, both of which have historically provided consumer protection. In fact, the Fed was earlier involved in the credit card late fee controversy referenced above, having in 2010 issued a regulation implementing the Credit Card Accountability Responsibility and Disclosure (CARD) Act that Congress enacted in 2009. Congress later transferred authority for administering CARD Act rules from the Fed to the CFPB.

A major motivation for abolishing CFPB is to rid the country of an agency that was initially accountable to neither the executive branch of the federal government nor to the independent Federal Reserve, and that received its funding from the Fed. Though these provisions were intended to shelter the CFPB from political influence, they were arguably wrong. Only later intervention by the Supreme Court, which thankfully occurred in CFPB’s infancy, clarified and corrected these initial funding and organizational errors.

As DOGE’s Musk and Ramaswamy seek proposals to fulfill their mission to reduce federal spending, repealing CFPB’s enabling legislation and abolishing CFPB should be high on their list.

Read more at: Mises.org