Here comes the latest race to the bottom in consumer finance

The Consumer Financial Protection Bureau is systematically removing guardrails designed to prevent abuses in the consumer finance market. With each retreat from its oversight obligations, the CFPB is expanding the opportunities for firms to market exploitative products and services.

We have been here before. Prior to the creation of the CFPB, agencies charged with overseeing banks and protecting consumers turned a blind eye as lenders made billions of dollars of mortgage loans that borrowers could not afford to repay. These loans were the seeds of the 2008 financial crisis.

Acting CFPB Director Russell Vought has announced that the bureau will provide little or no oversight to fintech companies and will, instead, focus on mortgage loans made by banks. The free pass that Vought has granted nonbank entities, including Elon Musk’s XMoney, permits consumer financial products and services to flourish unchecked. It also puts banks and other depository institutions at a disadvantage. If history is a guide, banks will respond by introducing their own fintech products and those, too, will be free of CFPB scrutiny.

Vought has also shielded financial institutions from liability by dismissing more than half of pending CFPB enforcement actions. He has also vacated settlement agreements and refunded civil penalties that defendants had paid to the CFPB. The majority in Congress has augmented Vought’s efforts with actions like revoking the CFPB’s authority to supervise nonbank financial firms that provide digital consumer payment apps. With these actions, President Donald Trump, Vought and their allies on the Hill are eviscerating consumer financial protection, and leaving consumers exposed.

Twenty years ago, the federal bank regulators — the Federal Reserve, the Office of the Controller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision — refused to exercise their authority to curb banks’ appetite for risky and exploitative loans. Likewise, Congress ignored calls for intervention to prohibit lenders from making loans that borrowers could not afford. Through deceptive marketing and business practices, lenders made dodgy loans to the most naïve borrowers and cashed out by selling bundles of these loans to investors. A race to the bottom ensued with lenders of all stripes pushing loans that eroded the stability of the entire financial system — a fact disastrously revealed by the economic collapse of 2008.

Without guardrails, financial markets break down.

Vought’s actions are especially consequential because without an effective CFPB, there is no federal agency with broad power to police consumer finance. Prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act, consumer financial protection was divided among multiple federal agencies with different, and sometimes overlapping, areas of responsibility. As a result, regulation of a financial service or product could involve multiple agencies, which created an intricate and confusing maze for financial institutions and their regulators. In the Dodd-Frank Act, Congress streamlined consumer financial protection and moved the primary enforcement of consumer financial protection laws from bank regulators to the CFPB. This simpler, more transparent regulatory structure benefited financial institutions and borrowers while making it harder for opportunistic firms to introduce predatory or potentially destabilizing financial products. At the same time, the centralization made it possible for Trump to paralyze federal enforcement of consumer protection by reducing the authority of one entity — the CFPB.

When the federal government abrogates its responsibilities, states can often respond by stepping in to fill the gap. This is not the case with the CFPB. Vought has announced limits on states’ ability to bring disparate impact discrimination claims under federal law and has asserted that states cannot bring claims under the federal Truth in Lending Act and the Fair Credit Reporting Act.

Decades ago, as abusive lending took hold and the federal government refused to respond, states attempted to pass legislation curbing the worst lending practices. That effort failed because federal bank regulators claimed that federal law preempted any state efforts.

By removing legal guardrails and disempowering states, Vought and his allies have shirked their congressionally imposed obligation to protect consumers and promote a fair marketplace. That, by itself, is a bad thing. Vought’s decisions will have further consequences when entities in the consumer finance market take advantage of the gap in oversight and commence a race to the bottom — with unpredictable results.