Discover Bank will have to pay out $18.5 million after the Consumer Financial Protection Bureau (CFPB) found that it had deceived student loan borrowers and violated their rights, the agency announced Wednesday.
Discover’s misdeeds include billing borrowers incorrectly, withholding accurate information that student loan borrowers need in order to claim federal tax deductions, harassing phone calls to debtors and other violations of collections law, and failing to correct their collections practices for months after becoming aware of the violations.
The agency’s order requires Discover to pay back $16 million to tens of thousands of borrowers who were affected by the company’s practices, update its practices so that current customers are not harmed, and pay a $2.5 million civil penalty to the CFPB itself. The enforcement follows a much larger action announced Tuesday against Citibank, in which the agency won $700 million for credit card customers and another $35 million in civil penalties.
Those civil penalty payments go into a fund that augments the CFPB’s main line of work. The agency’s Civil Penalty Fund exists to make victims whole when direct consumer relief payments are insufficient. Money left over after those victims’ compensation payments can be used to fund some more proactive consumer assistance. The fines are used to pay contractors to perform consumer education efforts that can help people avoid victimization in the first place.
The CFPB’s actual operating budget comes from the Federal Reserve. The agency was designed to be independently funded so that the partisan and ideological whimsy of budget appropriators in Congress could not affect or undermine the group’s work on behalf of citizens.
But as the CFPB turned four this week, Republicans in the Senate worked to revoke the agency’s independence from Capitol Hill politics. While finishing up a $20.6 billion spending bill for financial services issues and agencies on Wednesday, an appropriations subcommittee tucked in provisions that would tear down the CFPB’s careful architecture.
The measure would put CFPB funding under congressional control and replace its director with a five-person board populated by partisan appointees. That’s how other prominent financial regulatory bodies are structured. For generations, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have relied on politicians for their funding and had rotating casts of commissioners appointed to maintain a partisan balance.
The commission structures have made it harder for these regulators to adopt a path forward in certain situations, and opened the door to delay or even sabotage proposals that the industry opposes. In 2013, for example, one Democratic appointee to the CFTC was able to significantly water down a set of disclosure rules tied to derivatives — esoteric financial products that are more like gambling tickets than traditional investments, and which played a central role in the 2007–2008 Wall Street meltdown — by threatening to side with the group’s Republican commissioners.
Similarly, putting the CFPB’s budget to a vote in a body that relies on Wall Street campaign cash would inherently weaken the agency’s ability to do its job. The SEC has been consistently underfunded by Congress for the past five years, even as the agency’s responsibilities to the public increased dramatically with the passage of the Dodd-Frank Wall Street reform package in 2010.
The CFPB’s independence has made it potent: After the $700 million Citibank action this week, the agency has won over $11 billion in consumer relief in just four years of existence. Independence has also meant the agency’s professionals could explore markets on behalf of consumers in ways that politicians would probably try to prevent if they could. Before the CFPB, for example, it was much harder to prove that unregulated payday lending is inherently abusive and derives most of its profit from trapping poor people in endless debt cycles. Republicans in Congress have compared the regulator’s anonymous data-gathering, knowledge-building efforts to the Nazi secret police force’s surveillance of citizens.
Regulators structured according to the GOP’s wishes have struggled to keep above water in that same time frame that the CFPB has distinguished itself. It is much easier for the industry to “capture” regulators that don’t get independent funding and have to filter all decisionmaking through a partisan, consensus-driven commission structure at the leadership level. President Bush’s SEC heads were famously hostile to the idea of financial regulation, and oversaw an unexplained rule change that helped inflate the housing bubble to catastrophic levels. The country’s other financial regulators have faced extensive criticism that they are failing to hold a highly profitable industry accountable to the public’s interests just a few years after taxpayers rescued that same industry from collapse.
This post originally referred to the Civil Penalty Fund as part of the CFPB’s operating budget. It is a distinct fund.