5 Ways That the CFPB Could Actually Help Consumers
President Trump’s appointee to head the Consumer Financial Protection Bureau (CFPB), Kathy Kraninger, is set to testify this week before the House Financial Services Committee, and the results are bound to generate fireworks. There is no love lost between Trump and committee chairwoman Rep. Maxine Waters (D-CA), especially with regard to the CFPB.
The tug-of-war over the agency’s direction began almost since the moment it was created as part of the Dodd-Frank legislation passed in the wake of the 2008 financial crisis. Democrats have considered the CFPB the crown jewel of federal consumer protection, while Republicans have charged it as a rogue and unaccountable bureaucracy, acting arbitrarily and at times illegally to hurt private business.
Upon winning the White House, Trump made clear his intention to rein in the agency and install his own director, a move that sparked Ms. Waters to accuse Trump of attempting to “roll back consumer protections,” and “prioritize Wall Street at the expense of consumers.” While this sets the stage for what is sure to be intense political theatre at the hearing this week, with Washington divided, don’t expect much else to come out of it. The focus on the CFPB, however, does provide an opportunity to highlight how the agency can move beyond past controversies and political wrangling and best serve America’s consumers.
First, the CFPB can start by clearly defining its core mission. The justification for its creation, we were told, was to prevent another financial meltdown. Instead it’s become the self-appointed czar of nearly every type of lending transaction -- from small dollar loans to auto financing -- that had no bearing on the 2008 crisis. A litany of federal agencies already regulate financial institutions and enforce actions for unfair and deceptive trade practices, along with 50 state attorneys general. With so much overlap in the federal bureaucracy, it is no wonder the CFPB wandered beyond its scope.
Second, the agency should seek to protect consumers within the context of supporting a healthy free-market. After all, consumers are ultimately served by for-profit businesses who offer products and services that consumers want or need. The Small Dollar Lending Rule, a.k.a. “payday loans,” is a prime example of deliberately anti-business rulemaking. Under the agency’s first director, Richard Cordray, the CFPB’s payday lending ruled was designed to put storefront lenders out of business. Without offering even the slightest bit of evidence that short-term loans were a net harm to consumers (a key element in the definition of “unfair”), the original rule should never have been implemented. Furthermore, these loans further generate far fewer per capita consumer complaints compared to mortgages or credit card transactions, according to the CFPB’s own website. Consumers within a free market should be allowed to make their own financial decisions, not have them made by unelected regulators. Thankfully, last month the Bureau re-opened this rule for comment, an issue sure to be hotly contested during the hearing.
Third, the CFPB needs to follow the proper rulemaking procedures as the law demands. The Administrative Procedure Act requires federal agencies to read through all public comments submitted to them during the rulemaking window. The CFPB has often disregarded this requirement, most notably hiring a government subcontractor to process over one million comments submitted in response to the notice of the aforementioned payday rule that was promulgated under Cordray. Ignoring standard procedures and public comments is entirely unacceptable behavior for a power-wielding federal agency.
Fourth, the agency must learn to do its homework and use accurate data. The CFPB has formulated rules without corroborating research or any clear showing of consumer harm, such as increased bankruptcies or delinquencies from a particular product or service. They further have pursued enforcement of claims of racial discrimination in lending in the aggregate, using zip codes of unverified complaints as a basis to assume discrimination took place. Such a wide net of data lacking context can lead to unfounded charges and reputational harm to lenders attempting to comply with fair lending laws.
Finally, the CFPB must jettison the partisanship and ideology that has plagued it from day one. It did not help that its first full-time Director, Richard Cordray, had his eye on the governorship of Ohio in formulating his agenda, nor did it help that upon opening its doors the CFPB overwhelmingly filled its desks with Democrat lawyers. Under Mr. Cordray the agency further nurtured intimate relationships with ideological allies, such as the Center for Responsible Lending, with whom they would meet behind closed doors. When formulating rules and enforcing actions, all sides should have equal access to the agency’s ear, from advocacy groups to the business community.
It is a welcome sign that Ms. Kraninger has embraced reform, signaling an end to the CFPB’s ideological and rogue past. The hearing on Thursday will offer consumers little substance, but we should hope she makes good on her promises, allowing the CFPB to finally become a trusted watchdog for both consumers and the free market that serves them.
