What the CFBP Should Do Differently

What role should the Consumer Financial Protection Bureau play in regulating its industry? Although there is debate as to whether the Bureau should exist at all, policy analyst Diego Zuluaga argues in an op-ed recently published at The Hill.

Established in the wake of the financial crisis, the CFPB courted controversy from the start. As an independent agency headed by a single director who could only be dismissed for negligence or malfeasance, the bureau enjoyed an autonomy unprecedented in U.S. regulatory history.

Judge Brett Kavanaugh from the D.C. Circuit Court of Appeals wrote that ’[the CFPB’s] Director enjoys more unilateral authority than any other officer […] of the U.S. Government, other than the President.’

The first director, Richard Cordray, set about remaking American consumer finance by slapping punitive fines on providers and broadening the CFPB’s remit to include, among others, auto dealerships.

Under his direction, the bureau introduced a rule to restrict arbitration clauses in financial contracts, an intervention that would likely have raised the cost of credit.

Cordray also championed measures to severely constrain payday lending, an expensive form of short-term borrowing that can nonetheless be a lifeline for borrowers who have run out of options.

Indeed, throughout the CFPB’s first five years of existence, Cordray made little effort to dispel the fear among financial providers that the bureau was out to get them.

This may have been Cordray’s understanding of what the CFPB ought legitimately to do. Yet, in combination with the absence of effective checks and balances, his proclivity for regulatory intervention invariably created uncertainty.

By and large, the CFBP has been a destabilizing force for the financial industry. Zuluaga shows some of the ways the bureau has harmed the sector it purports to protect.

Consumer finance is an area particularly in need of legislative certainty, because it involves critical sources of short-term funding for households and is currently undergoing substantial disruption from online lenders and greater use of data in credit allocation.

Furthermore, the most prolific users of products regulated by the CFPB, such as short-term lenders, debt collectors and mortgage servicers, are people on low and middle incomes.

Politicization is not the CFPB’s only weak point. The bureau has devoted precious little effort to ensuring that regulation does not stand in the way of innovation and choice. Yet, as a rule, firms should be allowed to offer a range of products, and consumers should have the freedom to choose.

Zuluaga advocates turning the bureau from a single-director agency into a multi-member board, akin to the SEC or the Fed, and moving the bureau away from the auspices of the Fed and over to the FTC. 

The Fed’s regulatory remit involves prudential regulation and financial stability; that is, making sure bank balance sheets can withstand losses and, if they don’t, that contagion is minimized.

The FTC’s mission, on the other hand, is to protect consumers and promote competition. The CFPB’s role better matches the FTC’s because it involves not risk minimization but protecting the financial well-being of consumers.

A greater focus on competition and consumer welfare, moreover, might help the bureau to resist the temptation to overregulate.

And although Zuluaga acknowledges that there is a case for eliminating the bureau altogether, he cautions that so long as it still exists “it must be turned from foe into enabler of consumer finance.” 

The full piece is available here.