The CFPB Is Harming the Very People It Was Supposed to Protect
This July will mark the seventh anniversary of the founding of the Consumer Financial Protection Bureau (CFPB). Created by the Dodd-Frank Act in the wake of the 2008 global financial crisis, its proponents envisioned the CFPB as a completely independent consumer watchdog designed, in theory, to be immune to political pressure. However, by violating basic separation-of-powers principles, the agency actually became unaccountable and far more politicized than the traditional agency structured as a bipartisan commission.
Last year, the CFPB finalized two regulations that would harm the very consumers Congress tasked the bureau with protecting. The first regulation banned mandatory arbitration clauses in financial services products, which would have enriched trial lawyers and raised the cost of credit for all Americans, rather than benefit consumers. Fortunately for consumers, Congress and President Trump were able to use the Congressional Review Act to repeal this misguided rule. However, the second CFPB regulation, which deals with small-dollar and installment loans, remains in place and there is precious little time remaining to pass Congressional relief.
Under former Director Richard Cordray, the CFPB did not operate with the empirically supported best interest of consumers in mind. The final small-dollar rule encompasses payday, installment, and automobile title loans. Consumers with minimal access to traditional financial services are the primary users of these products. By its own measure, the CFPB estimates that “payday loan volumes will decrease by 62 percent to 68 percent, with a corresponding decrease in revenue.” Eliminating nearly 70 percent of a market—the CFPB estimate of the rule’s potential impact—does nothing to move consumers toward traditional banking products. Instead, the CFPB is cutting off more than eight million borrowers from access to credit, because conventional financial services cannot and will not serve those consumers.
Sadly, the bureau is very much aware of what the rule will do to those Americans that rely on small-dollar products, but a reader must make it through three-quarters of a 1,690-page rule to get to the substance. In its final rule, the Bureau acknowledges that small-dollar credit products are “typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses,” and the regulation will cause a "substantial reduction in the volume of short-term payday and vehicle title loans.”
Essentially, the CFPB’s rule targets products which primarily serve consumers without access to traditional financing options, but doesn’t mention what types of lending should or could fill the credit void left by the rule.
Fortunately, the culture of the CFPB seems to be changing. Office of Management and Budget (OMB) Director Mick Mulvaney currently serves as interim director of the CFPB. Mulvaney has long been critical of the structure of the bureau, once saying “It’s a wonderful example of how a bureaucracy will function if it has no accountability to anybody.” As part of a commitment to making the bureau more open and accountable, the interim director should begin re-examining the small-dollar rule, prioritizing consumer choice and empirical data over ideology.
In fact, Mulvaney’s unique position as the Director of both the OMB and the CFPB provides an opportunity to delay implementation of the small-dollar rule or even repeal it outright. Should Congress prove unable (or unwilling) to use the Congressional Review Act to provide relief for millions of consumers, Mulvaney has broad authority to act. As interim CFPB director, Mulvaney could start unwinding the rule by delaying the enforcement date until 2019 and begin the process of reworking the small-dollar rule in order to address the needs of consumers that would lose credit access under the current rule. He could also use his authority as OMB Director to invoke the seldom-used Paperwork Reduction Act to cancel the rule, due to the costly, excessive paperwork burdens it would impose on lenders and regulators.
It is in the best interest of consumers for Interim Director Mulvaney to use the tools at his disposal to prevent the CFPB’s harmful rule from limiting consumer access to credit. Vulnerable Americans across the nation have found themselves without access to traditional financial services, and the CFPB’s small-dollar rule will further restrict their options. Rather than allowing the small-dollar rule to cut off millions of Americans from credit, the Bureau has an opportunity to ensure consumers can access a robust and open financial market.