Erica Plasencia

Economic Equity Program Manager

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Many Americans – especially those in communities of color – express a lack of trust in banking institutions and it isn’t difficult to see why. From overtly racist practices like redlining to banking practices like hidden fees and undisclosed fines, the U.S. financial system has a history of causing disproportionate harm to anyone who isn’t wealthy and white.  

Examples over recent years highlight the various financial abuses that have impacted consumers, eliciting enforcement actions from the Consumer Financial Protection Bureau. These violations run the gamut: Trident Mortgage Company – an under regulated nonbank lender – was found redlining in majority-minority neighborhoods, Regions Bank for surprise illegal overdraft fees, and Wells Fargo’s mismanagement of mortgage and auto loans leading the CFPB to enforce its steepest fine yet of $3.7 billion. Many of these consumer violations have hit low-income people and communities of color particularly hard.  

These financial institutions’ violations of consumer rights underscore one of the many reasons the CFPB is imperative to the financial health of our economy. Since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the CFPB has put in the work to make financial services fair, accessible, and non-deceptive. In other words, they are a consumer watchdog. However, a recent panel of Trump appointed judges in the 5th circuit court recently ruled in an attempt to weaken the CFPB’s regulatory authority by deeming its funding structure unconstitutional.

So, let’s break down how and why the CFPB is funded, and the potential reasoning behind the conversative court’s attempt to defund the CFPB.

What is the CFPB and Why Was it Created?

After the 2008 financial crisis and the Great Recession that followed, it was clear that the predatory, deceptive lending practices that created the subprime mortgage crisis needed to be reigned in. In 2010, the Obama administration enacted a series of financial reforms and regulations through the Dodd-Frank Wall Street Reform and Consumer Protection Act, formally establishing the CFPB to oversee Federal financial laws that protect consumers. The CFPB helps ensure the financial market is a level playing field by cracking down on bad financial actors that engage in unfair, deceptive, abusive, and discriminatory practices that harm consumers. 

Congress made an intentional decision to fund the CFPB outside of the appropriation process, meaning Congress would not have decision-making power over the agency’s yearly budget. This decision was intended to ensure the CFPB could remain independent from political pressures that could impact its oversight on the financial industry. As the Public Interest Network elaborates, “Congress created the CFPB in the wake of the 2008 economic crash and set it up for success by making sure it could serve consumers without being manipulated by the very industry it is meant to rein in.”

This decision was intended to ensure the CFPB could remain independent from political pressures that could impact its oversight on the financial industry.

Attempts to Undermine CFPB’s Authority

Since the inception of the CFPB, Wall Street, big banks, and predatory lenders have attempted to undermine its authority, sometimes with the help of Wall Street friendly politicians. For example, Judge Cory Wilson, one of the Trump appointees in the 5th circuit court that ruled against the CFPB, has received thousands in campaign donations from the banking industry. This is no coincidence. The financial industry has a track record of leveraging its resources and political influence to secure policies that are favorable to financial interests. 

In Community Financial Services Association v. CFPB, the 5th circuit court asserted the CFPB’s funding structure was unconstitutional because it violated the appropriations clause, due to receiving funding from the Federal Reserve rather than through appropriation bills through Congress. However, Congress created this independent structure specifically to prevent another 2008 recession by consolidating oversight and responsibility of consumer protection from multiple agencies into one. The funding structure of the CFPB is also not unique–it was modeled after other independent agencies like the OCC, FDIC, and the Federal Reserve which funds the CFPB by a congressional cap imposed by Congress itself.

The 5th circuit’s legal reasoning was that the CFPB is “double insulated” from Congressional appropriations, granting it more power and authority than other regulatory agencies. But nowhere in the constitution does it indicate that “double-insulated” agencies are unconstitutional, nor does it say the power of an agency should impact its funding. While Congress does have a responsibility to pass legislation to fund an agency before the agency can carry out its functions, it already did that by passing Dodd-Frank.

So why is the CFPB’s funding mechanism under attack? Simply put, because the CFPB is solely focused on reining in abuses from the financial services industry and putting money back in consumers’ pockets. And for banks and the politicians they bankroll, that could mean fewer  profits. By limiting the CFPB’s authority, politicians like Patrick McHenry–the Chairman of the House of Financial Services Committee, who has received over $9 million from the financial industry–has the ability to thwart the CFPB’s reach to regulate and oversee the same industries that make up his donor base. Talk about a conflict of interest. Eroding the CFPB’s independence will hand politicians like McHenry the ability to influence Congressional debates over whether or not the CFPB should be funded under appropriations at all. 

If the 5th circuit’s ruling stands, not only will this create uncertainty in the financial sector by bringing all of the CFPB’s past regulatory actions into question, but it would also limit future enforcement actions intended to protect consumers. Legal challenges to the CFPB’s enforcement actions have already been brought up in court. One day after the 5th circuit’s ruling, TransUnion cited the ruling as grounds to dismiss pending CFPB enforcement actions against them. 

These efforts to water down the CFPB are an attack on consumers – primarily people of color and immigrants – who bear the brunt of deceptive lending practices and interest rate markups

Maintaining a strong CFPB ensures that there is a watchdog cracking down on illegal discrimination against people because of their race or ethnicity: who can open checking accounts, whose home is unfairly valued, who gets saddled with more costly, high-interest loans, who bears the brunt of credit card late fees, and more. These protections that many families rely on limit barriers for economic mobility and create opportunities for families to build wealth and secure a future for our families—something long denied to us.

So whose interests are we protecting?

What’s next for the CFPB?

With growing concerns of an economic recession and the effects of the pandemic still looming over many communities of color, the CFPB’s work is important and urgently needed. Following the 5th circuit ruling, the CFPB submitted a cert petition requesting the Supreme Court to review the case. The Supreme Court’s decision, which is expected to come in early 2023, could have serious implications for consumers that depend on the agency’s protections.  

As a recent poll highlights, the CFPB has strong support amongst voters across the political spectrum. Maintaining a strong, well-funded CFPB that isn’t subject to partisan politics reflects what voters want, and is ultimately what is needed to ensure financial institutions don’t worsen the economic conditions of Americans as they have in the past. 

In the next few months, the Greenlining Institute will continue to highlight the CFPB’s accomplishments and provide updates on the Supreme Court’s review of the 5th circuit case. In addition, we will continue to look for opportunities to build support for the CFPB and hold its critics accountable to communities of color that are disproportionately harmed by financial industry interests. Our partners at Americans for Financial Reform’s campaign to #DefendCFPB has brought individuals, groups, and organizations together to uplift its work. You can help support this campaign by retweeting representatives who have publicly supported the CFPB or by sharing posts that give credit to the CFPB’s work with the hashtag: #DefendCFPB.

We demand that our local and state leaders publicly support the CFPB and stand with consumers. By unifying our efforts, we can urge the Biden administration and our elected officials to fight to maintain a strong, independent, and well-funded CFPB to ensure our financial security and future.

Erica Plasencia

Economic Equity Program Manager

Read Bio