Chain saws have no place in financial services regulation

Have you heard about the government agency led by a guy holding a chain saw as he promises dramatic cuts in regulation?

Think it’s a story about Elon Musk and the Department of Government Efficiency? It’s also about James Gilleran, leader of the Office of Thrift Supervision, or OTS, who did the same thing years earlier. What makes the OTS story particularly useful today is that we know what Gilleran’s chain saw led us to: the Great Recession.

That’s in part because the OTS not only didn’t stop lenders it regulated from making the loans that brought down the economy, it even said they could ignore state laws preventing predatory lending. Many of those lenders failed during the Great Recession, including former household names like Washington Mutual, IndyMac and Countrywide.

In 2010, Congress abolished the OTS in the Dodd-Frank Act, the same law that created the Consumer Financial Protection Bureau. Congress charged the CFPB both with preventing the lending that led to the Great Recession and with blocking banks, debt collectors, credit bureaus and others from abusing consumers. And the CFPB has done just that, adopting protective rules and returning more than $21 billion from bad actors to consumers.

But now the CFPB and consumers are in trouble. More than 15 years after the Great Recession, many have forgotten why Congress created the CFPB. But those the CFPB regulates — who still care more about their profits than about protecting consumers — want to use a chain saw on the agency so they can make more money. Elon Musk may also benefit financially from eliminating the CFPB.

President Trump’s first CFPB director, Mick Mulvaney, viewed the bureau as a “sick, sad joke.” But he still pledged to follow the law and in fact the first Trump administration went beyond the legal minimum, filing more than 80 cases to enforce consumer laws.

But the second Trump administration sees less value in following laws it dislikes. And it very much dislikes the CFPB. Musk tweeted that the CFPB should be deleted and President Trump called the bureau “a very important thing to get rid of.”

Consequently, the new administration has been savaging the CFPB, while gaslighting American consumers about what it is really doing. Thus, despite the administration’s claims that the CFPB will continue to function, it barred employees from entering the bureau’s headquarters and removed the CFPB sign from the entrance. The administration told nearly every CFPB employee to stop working. In contrast, Trump’s first CFPB director brought donuts to his new colleagues.

Trump’s nominee to lead the CFPB, Jonathan McKernan, pledged to follow the law. But whether the administration plans to keep that promise in any meaningful way remains to be seen, especially as Mr. McKernan refused to say whether the CFPB should be eliminated or even whether the agency returning billions to consumers was positive.

Meanwhile, a CFPB employee reported that multiple senior executives stated that they planned to fire all but the five CFPB employees that the law, in their view, required them to retain, and that the agency would be reduced to a room with five men and a phone. Even if those five are also armed with chain saws, it is hard to see how they will stop the next Great Recession.

Various entities sued to keep the CFPB operating. The district court issued an opinion saying of the administration’s only witness that he “had the demeanor of an abused wife brought to court by her husband to drop the charges.” The court called the administration’s filings “highly misleading, if not intentionally false”; concluded that “that the Court is left with little confidence that the defense can be trusted to tell the truth about anything”; and found administration officials “have absolutely no intention of operating the CFPB at all.”

That court blocked the administration from firing CFPB employees. But an immediate appeal resulted in an order allowing the agency to fire employees not needed to accomplish the bare minimum the law requires.

The administration responded by laying off 80% of the bureau employees in a process so slapdash that the district court accused administration officials of thumbing their nose at the courts. But while the courts sort out exactly what the bare minimum is, the reality is that it won’t be enough to protect consumers. The Dodd-Frank Act necessarily left some discretion to the bureau’s leaders in the hope that they would exercise it fairly to protect consumers rather than legalistically to protect businesses. For example, the Dodd-Frank Act doesn’t require the bureau to bring cases to enforce consumer laws, and so debt collectors, banks, credit bureaus and others may now have the freedom to abuse consumers without having to worry about the bureau suing them.

Musk’s chain saw can already claim a substantial victory against consumers ­— which means we may be headed to another disaster. Chain saws may be useful for wood but they bring consumers only pain.