Tuesday, November 17, 2015

Consumer Financial Protection Bureau: An Agency for the American Consumer?

The Great Recession, which has been the worst financial crisis since the Great Depression, sparked major financial regulation in the form of Dodd-Frank. Part of this 2,300-page legislation included Title X, which established the Consumer Financial Protection Bureau. The CFPB is an entity within the Board of Governors of the Federal Reserve System that is supposed to regulate the "offering and provision of consumer financial products and services under federal consumer financial laws." Republican presidential candidate Carly Fiorina took a jab at the CFPB saying that the CFPB has "no congressional oversight." Politifact rated this claim half-true since the CFPB technically has some congressional oversight, even if it is significantly lower than other agencies. Congressional oversight notwithstanding, what I would like to know is if the CFPB has succeeded in its mission statement of "empowering consumers to take more control over their economic lives." These subsequent points summarize the research I was able to find:

  • The Mercatus Center released a working paper in September about unintended consequences from the CFPB, stating that "although stricter regulation of permissible debt collection practices can benefit consumers who are in default and increase demand for credit by consumers, overly restrictive regulation will result in higher interest rates and less access to credit for consumers...it may also have the unintended consequence of providing incentives for creditors to more rapidly escalate their efforts to more aggressive collection practices, including litigation."
  • The Cato Institute published a research brief in February showing how the regulations with Dodd-Frank, and more specifically the CFPB, have disproportionately burdened smaller banks with compliance costs.
  • The Mercatus Center also released a study back in August showing [with CFPB data] that consumer arbitration settlements are preferable to heavy-handed regulation from the CFPB. 
  • To be fair and bring in other points of view, the Left-leaning Center for American Progress makes the argument in its issue brief that it has protected consumers in the mortgage market.
  • The Right-leaning Heritage Foundation put out an issue brief earlier this month showing how payday lenders provide a vital service to the financial sector, as well as how regulating these lenders compounds issues burdens in the financial sector.
  • The CFPB has created a "Qualified Mortgage" category that has imposed strict home financing standards for lenders and borrowers alike. 
  • Checking accounts have become more expensive for lower-income family households, which is why these households have gravitated towards prepaid cards. As the American Action Forum illustrates, recently proposed CFPB regulations would most probably eliminate prepaid cards as an option, thereby leaving more unbanked Americans.

As the Federalist Society points out, we should not "impose 19th century regulatory approaches to a 21st century credit consumer economy." Having an agency with a director who has de facto power to deem any consumer product or practice "unfair" or "abusive" is perturbing indeed. Back in its 2013 report on the CFPB, the Heritage Foundation made some suggestions for reform, including striking the undefined term of "abusive" from the CFPB's purview, prohibiting public release of unconfirmed complaint data, abolishing the deference in judicial review granted to the CFPB, and downright abolishment of the CFPB. At the end of the day, we should make it easier for the American people to have access to credit, not more difficult. While the passage of time will better tell us whether the CFPB helps the American consumer, it seems that there is enough out there to make us doubt whether CFPB regulations have done more good than harm.

If you want more information on the CFPB, you can go to the CFPB's website, read this Congressional Research Service brief, or this financial audit from the Government Accountability Office that was released earlier this week.

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