Recently, the US Court of Appeals for the District of Columbia launched an attack on the CFPB (Consumer Financial Protection Bureau), a federal agency with a lot of baggage. This agency has tightened its grips on payday advance loan providers with the argument that they lure low-income Americans to a trap. The CFPB has been described by the appellate court as “a gross departure from settled historical practice” and “unconstitutionally structured”.
Brett Kavanaugh, a Circuit Judge of the US, argued that the structure of the agency poses a really great risk of arbitrary decision-making, as well as, abuse of power. Moreover, it is considered that the agency is a greater danger to individual liberty as compared to other multi-member independent agency.
The judicial retaliation was long-overdue. After the financial crisis in 2008, it is believed that the CFPB went absolutely off the hook and began to wield primarily unilateral power to overwhelm both employers and employees with massive financial regulations.
The agency functions almost completely outside of the domain of congressional oversight. It gets its funds as a percentage of the budget of the Federal Reserve. Neither does the CFPB rely on approvals for funding through the general or normal process of appropriations nor is the agency under any kind of obligation to modify its practices on the basis of congressional enquiries.
Director Richard Cordray, the head of the agency, is an appointee of the White House and can only be removed from the position by the President for justifiable causes. This was the case until the appellate court recently voided the provision of for-cause when it highlighted on the lack of transparency of the CFPB.
The rights to issue and implement financial regulations without any congressional approvals are still reserved by CFPB leadership. Financial services that are under the jurisdiction of the CFPB are credit cards, mortgages, check guaranteeing, loan servicing and payday loans.
The regulatory restrictions are especially more on payday lenders, who offer short-term loans to millions of low-income Americans in an urgent need of quick cash. The agency believes that regulatory oversight can protect the interests of the payday borrowers from the exceptional high rate of interest and “payday debt traps”, which leads to small-dollar borrowers never being able to repay their loans.
In order to undermine the relationship between the lender and the borrower, the agency has used “debt trap” for its argument. At present, the CFPB needs the payday lenders to verify the income of the borrower, their major financial commitments and history of borrowing before giving them the loan. In order to lengthen the procedure of payday lending, the agency has also announced a really long list of “affordability criteria”. This has led to the creation of a wall between lenders and individuals who are in desperate need of money.
Excessive red tape has also victimized community banks. Since the passing of the Dodd-Frank financial reforms in the year 2010 that led to the creation o the CFPB, only 3 new community banks have opened. Before, there was an average of hundred every year. The number of community banks is twenty per cent less than what is was before the issuance of the legislation. Even though the 22,000 page long regulation is aimed at the large investment banks to prevent another financial crisis, they are hurting the smaller banks in the process.
The CFPB’s overzealousness in handling the issue of payday advance loan providers and small community banks continues the traditional of overregulation of the federal government in the US economy. If the ruling of the District Court proved anything, it is that the government should play a really minor role.
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