Eight more states have joined a lawsuit aimed at challenging the constitutionality of parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the creation of the Consumer Financial Protection Bureau.
The CFPB was created in the wake of the financial crisis to protect consumers from predatory, unfair and abusive financial practices and has already taken action on many issues of concern, some of which contributed directly to the financial crisis. If the CFPB is ruled unconstitutional and dismantled, it is highly likely all the consumer protections it enacted would be dismantled along with it.
The suit originated in Texas, and was filed on behalf of a Texas-based community bank named State National Bank of Big Spring and two conservative political groups. It contends that both Dodd-Frank and the CFPB give too much power to federal officials, allowing unelected bureaucrats to “unilaterally liquidate financial institutions in which the state invests taxpayer dollars … [therefore depriving states] of basic due process rights and [placing] taxpayers’ resources at risk.”
It was announced on Wednesday that the state of Texas officially joined the suit along with Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, and West Virginia. Oklahoma, South Carolina, and Michigan were the first states to sign on. Just for good measure, the suit also names Federal Reserve Chairman Ben Bernanke as one of the defendants.
Ending Predatory Financial Practices
The CFPB’s stated mission is “to make markets for consumer financial products and services work for Americans — whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” In its short lifespan, the agency already has a remarkable list of accomplishments under its belt, including:
- Helping to make credit card agreements easier to understand.
- Helping to make financial-aid options easier for parents and prospective college students to understand.
- Focusing on oversight of consumer credit bureaus, to make sure credit information is accurate, as well as quickly and easily fixable.
But the best known and perhaps most important of the CFPB’s consumer-protection accomplishments is new mortgage-writing guidelines that protect prospective homeowners from the kind of predatory lending practiced in the years leading up to the crash.
The new rules would incentivize banks to write mortgages fairly and squarely — offering them some measure of protection from consumer lawsuits as long as they follow a set of common-sense guidelines, which include checking such basic items as current income, current employment status, current debt obligations, credit history, and the projected ability of the borrower to make his or her monthly mortgage payment.
Believe It or Not, Everybody Wins
As crazy as it sounds, these kinds of underwriting basics were ignored on a massive scale by many banks in the years leading up to the financial crash. At the extreme end of the predation spectrum, some consumers were on the receiving end of no-income, no-job, no-asset loans (known in finance industry slang as “NINJA loans”) and got into homes they were never going to be able to afford.
Such predatory home-lending practices fueled the housing bubble that eventually crashed Wall Street and then the rest of the economy when it burst. It, of course, also crashed an untold number of personal finances along with it — personal tragedies people across the country are still recovering from.
If large parts of Dodd-Frank are ruled unconstitutional, including the CFPB, Americans will be back to square one when it comes to basic financial protections that we’re already beginning to take for granted. The banks were actually happy when the above-mentioned home-lending reforms were agreed to: They got protection from consumer lawsuits just for doing their due diligence on loans, which of course would also be better for them in the long run.
No bank wants bad loans on its books, and no consumer wants or needs to get into a mortgage, student loan, or credit card agreement that harms them in the short run and potentially the economy in the long run. As rare as it is in our polarized political world, with the Consumer Financial Protection Bureau, everyone actually wins.
John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the bleeding heart of capitalism on Twitter @TMFGrgurich.