What you should know about the Consumer Financial Protection Bureau

In the headlines, this independent watchdog focuses on protecting consumers from unfair lending.

Every year, thousands of Americans struggle to understand consumer financial products and services among an array of creditors and providers all fighting to part borrowers from their money. But there’s one government agency focused on watching out for American consumers: the independent Consumer Financial Protection Bureau.

What is the CFPB?

In the wake of the devastating financial crisis of 2008, politicians on both sides of the aisle committed to rebuilding the economy. Part of getting the country back on its feet was pinpointing how we got to crisis in the first place.

Many agreed that among the factors that led to the financial crisis was the inability for consumers to easily navigate the often complicated terms and conditions of the personal finance products they were committing to.

Oversight for the industry was spread across seven federal agencies that rarely worked together to protect the public from shady advertising and unfair, misleading lending practices that left many in over their heads.

To better regulate the financial industry and protect the public, the government signed in the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act. A centerpiece of Dodd–Frank was consolidating most of the financial industry’s authority under one independent watchdog: the CFPB.

What does the CFPB do?

The CFPB has a focused mission: helping consumers navigate the daunting market of financial products and services. It’s the central agency enforcing federal regulations designed to empower and protect consumers when making financial decisions. The CFPB fills in gaps in the public’s understanding of legal regulations across industries that include:

Who runs the CFPB?

The bureau’s only been around since 2010, making for a short list of directors. The CFPB was initially proposed and established by Elizabeth Warren, who served for just under a year before Raj Date replaced her.

Eventually, Richard Cordray took over the role, serving as director from January 2012 to November 2017. Prior to Richard’s departure, he named the agency’s chief of staff, Leandra English, as deputy director. Unlike many government agencies, the CFPB is not subject to presidential or even congressional oversight. It’s purposefully designed to commit its budget and resources toward empowering the public to better understand their options when it comes to creditors, loans and the broader financial industry.

But with a new presidency comes new criticism of the CFPB’s federal autonomy from those who see it as unchecked unilateral power that ultimately hurts the finance industry. In November 2017, President Trump moved to temporarily name White House Budget Director Mick Mulvaney as acting director for the CFPB. In response, Leandra English sued to challenge whether the president can legally appoint anybody to run the agency. The result is a power struggle that’s in play as of this writing. We’ll update this article as a resolution unfolds.

How does the CFPB help consumers?

The CFPB believes that a fair, efficient and transparent market depends on the ability of consumers to effectively compare the costs, benefits and risks of financial products. It works to untangle difficult and even deceptive misinformation that could lead consumers away from making sound financial decisions.

It breaks down complex terms and conditions into plain language designed to ease the stress of shopping and signing up for personal loans, credit cards, mortgages and more. Importantly, it also issues and upholds rules that govern how creditors and lenders can market, service and process payments for mortgages, student loans, credit cards and more.

Mortgages

The CFPB helps potential borrowers narrow down the best mortgage options for their situation and know what to expect at closing. Specifically, the CFPB requires mortgage providers to:

  • Send clear monthly statements that details how they’re crediting mortgage payments.
  • Credit your payments the day they’re received.
  • Provide advance notice if your adjustable rate mortgage is going to change.
  • Avoid initiating foreclosure until payments are more than 120 days late, allowing you enough time to apply for loan modification.

Designed with feedback from consumers, its Know Before You Owe mortgage disclosure rule replaces four disclosure forms with two new ones: the Loan Estimate and the Closing Disclosure. And to help you navigate the mortgage process, it provides tools like sample loan estimates and disclosures, a guide to owning a home and a home loan toolkit.

What is the “ability to repay” rule?

Under this rule, mortgage lenders are required to make reasonable, good-faith determinations of a consumer’s ability to repay any consumer credit transaction secured by property, while also limiting prepayment penalties. It’s a CFPB amendment to the Truth in Lending Act’s Regulation Z.

Student loans

As the costs of attending college or university soar, some 44 million students rely on loans to pay for tuition, books and other necessities of student life. The CFPB provides tools to help students demystify the costs, risks and benefits of student loans. The Know Before You Owe student loans project launched as a simple financial aid shopping sheet that colleges and universities could use to help students understand the grants and loans they qualify for, but it’s since evolved to a more refined guide used at more than 2,000 schools.

The CFPB also mediates student loan complaints through its free, confidential CFPB Student Loan Ombudsman, reviewing and resolving complaints through a fair, impartial process.

Credit cards

The CFPB passed the Credit Card Accountability Responsibility and Disclosure Act in 2009, ushering in important consumer protections that include interest rate stability, lower fees and clearer payment terms. Among its guidelines, the federal CARD Act requires credit card providers to:

  • Notify you before they raise your interest rates — and only under specific circumstances, such as after a late or returned payment.
  • Provide intro APRs for at least six months.
  • Give you at least 21 days after your statement is posted to pay your bill.
  • Limit your first late payment, returned payment or overlimit penalty to $25.

To help the millions of Americans that use credit cards better understand their contracts, the CFPB also developed a shorter, simpler credit card agreement that clearly breaks down complex terms for the consumer. Clickable sections include definitions, interest rates and fees, how interest in calculated and credit card factors that can change over the life of a contract. And it collects current credit card agreements into a database you can search by issuer, allowing you to know what to expect before you apply.

Short-term loans

When you need money quickly, a payday loan can be an option to get over your financial hump. But high fees and a short repayment period can mean paying a lot of money for the convenience. To help consumers avoid the risk of falling into payday traps resulting from repeat borrowing, the CFPB proposed a contentious new rule that requires payday, auto title and balloon-payment lenders to, among other regulations:

  • Conduct a “full payment test” to confirm that potential borrowers can make payments and still pay for basic living expenses.
  • Limit penalty fees for loans with APRs of 36% or higher.
  • Offer a 30-day cooling-off period after issuing a third short- or longer-term balloon-payment loan in quick succession.

Among its latest rules, the CFPB recently introduced a new rule to regulate arguably the most harmful part of payday loans: debt traps brought on by repeat borrowing.

Jennifer McDermott

Consumer advocate helping people improve their personal finances.

CFPB related news

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