The curious case of the CFPB

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(MoneyWatch) COMMENTARY Throughout the brief, turbulent history of the federal Consumer Financial Protection Bureau, critics have sought to characterize it as a threat to the banking industry, a rogue government snoop intent on strangling lenders with red tape. The regulatory agency represented nothing less than a "government takeover of the economy," warned Rep. Spencer Bachus, R.-Ala., in 2010 even before the new watchdog officially opened its doors last July.

So far, the banking industry is doing okay. Banks such as JPMorgan Chase (JPM) and Wells Fargo (WFC), which both announced large earnings increases Friday, are raking in profits. In one of its first major decisions, meanwhile, the CFPB this week hacked away some red tape for financial firms, proposing a rule that would to charge unlimited up-front fees. That would significantly relax new limits on card fees imposed by the Federal Reserve under the Credit Card Accountability Responsibility and Disclosure Act, a 2009 law that among other things issuers may charge.

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The CARD Act barred card companies from charging fees equal to more than 25 percent of a customer's credit limit within the first year the account was opened. The Fed last year expanded the restriction to include the application and processing fees that some issuers charge, typically for borrowers with spotty credit, even before the card is in use.

Now, following legal challenges by banks, the CFPB is moving to loosen the cap on those fees. That is angering some consumer advocates. One attorney at the National Consumer Law Center told The New York Times: "Even if it is a small rule, it affects the most vulnerable of consumers -- consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards. Exactly the sort of consumers that we think CFPB should stand strongest for."

The CFPB didn't explain why it wants to roll back the pricing restriction on pre-card fees. One possibility is that the bureau really thinks the Fed rule is too strict. Another is that it wants to signal to the financial industry that it is willing to compromise, perhaps giving the bureau more political capital in Washington to clamp down on what it considers more serious lending abuses. The agency, hemmed in by powerful opponents on Capitol Hill that have vowed to weaken it, also could be gun-shy.

Indeed, despite claims by banking industry lobbyists that the CFBP is unaccountable, the agency is arguably the least independent financial regulator. It must answer to a council of other banking and government agencies, which in some cases can override the bureau's authority. It is required to consult with other federal watchdogs before passing a rule. Congress also may change its rules, while the courts can ensure the agency remains within the law. 

Whatever the reason for the CFPB's move to ease the new card rules, for now it appears the bureau poses considerably less danger to the financial industry than its critics contend. Far from laying down draconian rules aimed at handcuffing banks, it must operate like any other government regulator, picking its battles and marshaling its limited resources. Whether that approach ultimately jibes with the CFPB's mission -- protecting consumers -- remains to be seen.

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