Central Financial Protection Bureau: Roles and Functions
Central Financial Protection Bureau is one of the new federal agency created during 2011 after its concept was included as part of Dodd-Frank Wall Street and Consumer Protection Act. In the wake of financial crisis of 2007-08, where many investors were left bankrupt after they invested in risky products without even understanding the nature of the investment, it was important for the federal government to establish an agency that could regulate financial products and also have supervisory powers to protect the consumers. CFPB has the responsibility to oversee financial products and services being offered to the consumers. Infact, CFPB through its regulatory and supervisory functions, has the capability to protect the US economy from another financial crisis,and the same is discussed below:
Regulate Credit Cards, Loans and Mortgages:
CFPB consolidates the function of many different agencies and oversee the parameters of credit reporting agencies, credit cards, payday and consumer loans. The agency protects the interest of homeowners by helping them in understanding the risk of a mortgage loan and the same time also regulates the credit fees levied by bank in the form of mortgage underwriting and bank fees. At the same time, it also protects the interest of the banks with a mandatory regulation of verifying borrowers income, credit history and current job status. As a result, it saves bank from any future contingency of losing their money because of sub-prime lending.
Prohibiting steering incentives:
Audacity of financial brokers and mortgage agencies to lend loan to sub-prime lenders in greed of higher brokerage and commissions, was cited as the prime reason for the financial crisis of 2007-08. Prior to establishment of CFPB, even loan originators were making high amount of money by getting the consumers to buy these services from the lender, brokers and other affiliates. However, CFPB has now put a prohibition that varies with loan terms. Furthermore, a brokers or loan officer can not claim more money if the loan is allocated to the borrower with poor credit history.
Such provisions will help in ending sub-prime lending to an extent and will surely save US economy from another financial crisis.
CFPB, in addition to its function of regulating financial products, also shares the initiative of educating the consumers about the financial risk in financial products. For instance, large number of consumers were trapped in high interest rates of credit card lending. Thus, CFPB educates the consumers as when to use a credit card and help them in understanding the risk associated with the use of credit cards. This helps the consumers in making sound financial decision. At the same time, it also helps the banks in terms of unrecovered amount credit cards and payday loans.
For Instance, Credit Cards are the most popular form of consumer credit in the United States, as two out of three American families have atleast one credit card and around 50% of American families owes a credit card balance. Thus, to help the millions of Americans and to make sure that they better understand the consumer credit agreements, CFPB has developed a prototype shorter and simple credit card agreement that clearly spells out terms for the consumer and the ill consequences of not paying back their credit card debts. The success of CFPB can be judged from the fact that, post its establishment in 2011, CFPB has recovered $760 million uncovered amount on credit cards from the defrauded consumers.
Continuous evaluation of financial health of the economic system:
Prior to the advent of the financial crisis of 2007-08, no single federal agency had effective tools and responsibility to establish standards for the whole financial market and consumer protection was just not in the priority list. Since no one was sufficiently responsible to ensure market stability, the economy saw nightmares of financial crisis with billions of dollars lost and trillions were bailed out. However, now the Central Financial Protection Bureau(CFPB) shares the responsibility to provide continuous and comprehensive outlook about the health of the entire system. CFPB apart from working on its regulatory and supervisory powers, takes consumer complaints, conducts survey to study consumer behavior and monitors financial markets for finding new risks to consumers and financial institutions.
Strict Laws and Regulation under Donn-Frack Act:
The parent act of CFPB, i.e Donn-Frack Act has a number of strict provisions so as to ensure that the US economy is saved from another financial crisis. For Instance, the Volcker Rule puts a ban on bank to use depositor’s money for using or owning hedge funds for the bank’s profit. Similarly, the Dodd-Frank Act required that the riskiest derivatives that contributed equally to the financial crisis should be regulated by Securities and Exchange Commission. In this way, the act ensures that excessive risk taking can be identified and can come into the notice of Federal Reserve, much before it leads into a financial crisis.
CFPB Issuing Rules to Prevent Loan Originators from Steering Consumers into Risky Mortgages. 18 January 2013. 23 February 2014 <http://www.consumerfinance.gov/newsroom/consumer-financial-protection-bureau-rules-to-prevent-loan-originators-from-steering-consumers-into-risky-mortgages/>.
Michaels, Clea Benson and Dean. Banks’ World Under Dodd-Frank Takes Shape With Volcker Rule. 11 December 2013. 23 February 2014 <http://www.bloomberg.com/news/2013-12-11/banking-under-dodd-frank-takes-shape-with-volcker-rule-approval.html>.
Slack, Megan. Consumer Financial Protection Bureau 101: Why We Need a Consumer Watchdog. 4 January 2012. 23 February 2014 <http://www.whitehouse.gov/blog/2012/01/04/consumer-financial-protection-bureau-101-why-we-need-consumer-watchdog>.