The Consumer Financial Protection Bureau: Too Far, or Not Far Enough?
Recall from the chapter that during the economic crisis of the late 2000s, subprime mortgages were sliced up and resold as specialized securities. As more and more households went upside-down, an estimated $2 trillion worth of these assets became toxic. The banks and investment houses that held these toxic assets could not sell them for even a fraction of their original worth, pushing those companies further into economic turmoil. As the crisis worsened and panic set in, some institutions took advantage of the lack of regulation and governmental oversight in the industry, selling these toxic assets to unsuspecting buyers as if they still held value.
 
Many of the participants in these schemes were eventually exposed, leading to a number of high profile, high stakes lawsuits. In October 2012, for example, federal prosecutors filed a $1 billion suit against Bank of America for knowingly committing mortgage fraud from 2007 to 2009. The discovery of rampant fraud in the financial sector also led to the creation of the Consumer Financial Protection Bureau (CFPB), a new federal agency tasked with regulating banks, payday lenders, and other financial services companies.
 
First proposed by Massachusetts Senator Elizabeth Warren in 2007 and signed into law in 2010, the CFPB proved a hot-button political issue from the moment it was announced. Lauded by consumer advocates eager for protection and loathed by Wall Street bankers who felt they were being unfairly punished, the CFPB captivated media attention as politicians debated the agency’s organizational structure. A congressional blockade forced President Barack Obama to skip over Warren as the agency’s first director, instead choosing Ohio Attorney General Richard Cordray in a controversial pro-forma recess appointment.
 
The CFPB’s core functions include writing and enforcing federal regulatory laws, restricting practices that it deems unfair or abusive, promoting financial education, and processing consumer complaints. Much of the controversy surrounding the agency revolves around its power to regulate business practices. In the first three months of 2013, for example, the CFPB issued 10 new regulations regarding credit card fees, automated teller machine (ATM) fee disclosures, and more. While some believe the CFPB is crucial to avoiding another economic crisis, others believe that the agency oversteps its bounds and stifles innovation.
 
Those who believe the CFPB should be allowed to maintain—even extend—its regulatory powers make the following points:
 
Weighing the positive aspects of the agency, the Economist’s Schumpeter blog suggests that the financial sector has long eluded regulation thanks to weak, ineffective legislation. The CFPB is agile, powerful, and aggressive enough to contend with a deceitful industry that has operated under its own rules for too long.
 
When you buy a new car, fresh produce, or ibuprofen, you can safely assume that the product has undergone rigorous testing to ensure that it is safe. When it comes to buying a mortgage or a credit card, however, you must rely solely on the word of the company trying to sell you the product. The CFPB serves as an independent advocate for the safety of individual consumers, says TIME’s Michael Grunwald.
 
The CFPB can restrict the practices that led to the Great Recession, and perhaps even prevent the next economic crisis. To this end, consumer advocacy group Consumer Action contends, “To prevent another bailout, we need to extend the government’s resolution authority – currently limited to FDIC-insured banks – to cover non-bank financial companies, as well.”
 
However, those who want to abolish the CFPB (or at least substantially limit its power) make several compelling counterpoints:
 
Weighing the negative aspects of the agency, the Economist’s Schumpeter blog suggests that the CFPB is far too large. A financial firm might be sued by one wing of the agency for providing a financial product to a segment of the population, and sued by another wing for not providing that same product to the same segment of the population. Thus, the column argues, the CFPD is destined to devolve into a prosecutorial bureaucracy.
 
According to CBS’s Marlys Harris, the CFPB will threaten the health of banks that provide financing for businesses, stifling job creation and innovation. By regulating the banking sector’s most profitable products and services, the CFPB will force banks to be more conservative with their money, making them less likely to grant loans to entrepreneurs and small businesses.
 
The United States Congress has a constitutional right to oversee agency budgets. However, the CFPB’s funding comes directly from the Federal Reserve, sidestepping congressional approval. Without a congressional check on CFPB spending, economist George Will argues that the agency is answerable to no one—and may even be unconstitutional.
 
1. In your opinion, is the Consumer Financial Protection Bureau necessary? Should its powers be extended, abridged, maintained, or abolished? Explain, citing the arguments you think are the most relevant to support your position.
 
2. In Chapter 1, you learned that business moves at breakneck speeds. On balance, do you believe that the Consumer Financial Protection Bureau will have an effect on change in the financial industry? Will it affect the U.S. economy as a whole? Explain.
 
3. How did the economic crisis of the late 2000s affect the United States’ overall economic environment? How does the Consumer Financial Protection Bureau fit into that environment? Use the chapter text to support your answer.
 
 
 
BUS105 Introduction to Business
 
Module 2 Assignment  
 
Ethical Scenarios
 
Read each of the 3 scenarios and answer each of the questions with 2-3 sentences.
 
Scenario