Reforming Consumer Agency Would Better Serve Consumers


With policymakers in the nation’s capital reconsidering reforms to financial services regulations implemented after the 2008 crisis, South Dakota’s community banks have a lot at stake.  While we know that community banks did not contribute to the meltdown on Wall Street, Washington’s response has had a negative impact on community banks ability to serve South Dakota communities.

​Among the top concerns to reformers is the Consumer Financial Protection Bureau, an independent federal agency that is accountable to neither Congress nor the White House. The CFPB has churned out a flow of new financial regulations so complex and overwhelming that the bureau is ultimately harming those it is charged with protecting—individual consumers. Reforming the CFPB to improve its accountability would go a long way to rein in excesses and support stronger economic growth at the local level.

Community bankers know all too well the negative effect of the CFPB on local lending. The bureau has issued a bevy of one-size-fits-all regulations that fail to adequately distinguish between Main Street community banks and the Wall Street megabanks that policymakers intended to rein in after the crisis. These onerous rules have restricted mortgage lending at nearly three-quarters of community banks and replaced customized, relationship-based loans with cookie-cutter bureaucratic standards—none of which serves consumers. Meanwhile, the rising regulatory workload has exacerbated consolidation in the community banking industry, which has declined from more than 8,000 in 2010 to less than 5,900 today, leaving fewer communities with access to responsible financial services providers.

The CFPB’s complex regulatory framework poses a tangible threat to the local communities that depend on community banks, which carry a disproportionate burden of any regulation because of their smaller size. Fortunately, reforming the CFPB is not as complex as the regulations it issues.

To promote tiered regulations that are tailored to the size and risk profile of regulated financial institutions, Congress and the White House should reform the CFPB consistent with a recent federal court decision that held the agency’s governance structure to be unconstitutional. In PHH v. CFPB, a federal appeals court ruled that the agency concentrates “enormous executive power” in its director. The court’s decision, which is under review, noted that whereas other agency heads serve at the pleasure of the president or lead boards of directors, the CFPB director is unaccountable and may regulate arbitrarily.

Replacing the CFPB director with a five-member commission will improve accountability at the bureau and ensure a diverse range of opinions and backgrounds are considered, ensuring more balanced regulatory oversight and consumer protection. A commission-based governance structure is already in place at the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and other federal agencies that do not share the CFPB’s checkered history of regulatory excess.

The CFPB should also be granted additional statutory authority to tailor its regulatory requirements to the unique circumstances of community banks and their customers. Meanwhile, subjecting the bureau to the congressional appropriations process—instead of funding the agency through a cut of Federal Reserve revenues—would further ensure it is subject to reasonable oversight.

​The American system of governance is one of checks and balances—countervailing forces that restrict government institutions from accumulating excessive power. The CFPB’s unbridled flurry of new regulations demonstrates a clear need for greater checks on its enormous executive authority. As Congress considers reforms to the bureau, overhauling its governance structure will ensure more balanced and responsible regulations that will no longer harm the consumers they are supposed to protect.