The CFPB could be a force for good


During Richard Cordray’s tenure as director of the Consumer Financial Protection Bureau, the CFPB hit American consumers and the economy while doing little to promote financial stability. The pain was particularly acute for low- and middle-income consumers who lost access to credit cards, faced higher bank fees and reduced access to free checks, and found it harder and harder. expensive to obtain mortgages, especially as first-time home buyers. In response, consumers turned to payday loans and alternative products like financial liferafts, but Cordray dug holes in them by imposing regulations that would effectively ban payday lending.

Yet despite its difficult beginnings, CFPB’s initial promise is solid: to protect and empower consumers, promote fair and competitive markets, and stabilize the financial system. Well-designed consumer credit regulations and strong enforcement of consumer protection laws make markets more transparent and give consumers the confidence to borrow and save. But poorly designed regulations stifle access to credit, push up interest rates and eliminate choice, forcing consumers to turn to less desirable financial options, even loan sharks.

One of the landmark accomplishments of President Trump’s first year was regulatory reform aimed at restoring the rule of law and promoting economic prosperity. Mick Mulvaney, CFPB’s acting director, announced in a staff memorandum last month that the office will go in a different direction under his leadership, and he’s already started to roll back some of its more nefarious regulations. As Mr. Mulvaney, or his permanent successor, contemplates how to reorient the agency further in the interests of consumer protection, he should consider five guiding principles: inclusion, innovation, choice, competition and respect.

Inclusion. The unintended consequences of Obama-era regulations fell hardest on low-income families. Regulations that eliminate credit options for those who already have little credit will not improve their lives. Working with the private sector and Congress to reverse this growing exclusion of Americans from the financial sector is a moral imperative.

Innovation. New financial technologies have the potential to disrupt consumer banking services in ways that benefit consumers. Yet the CFPB has stifled innovation at every turn. Non-traditional credit scoring and underwriting models anchored in big data offer hope for those without access to traditional banking services. Mr. Mulvaney should abandon the agency’s “regulation by execution” approach, which discourages experimentation by increasing the risk of retroactive liability. The office can help unleash the power of FinTech by energizing dormant tools such as the No-Action Letter Program and Project Catalyst, a CFPB initiative designed to facilitate “consumer-friendly innovation in markets.”

Choice. American families know better than bureaucrats which financial products best meet their needs. One of the justifications for the CFPB’s breadth of powers was to allow it to oversee the entire consumer credit ecosystem and break down traditional regulatory silos that focus on who issues financial products rather than on who issues financial products. the way consumers use them. CFPB should focus its efforts on empowering families instead of banning products or using trendy behavioral economics theories to “push” consumers towards decisions central planners favor.

Competetion. Excessive regulation disproportionately increases costs for small banks and credit unions, forcing them to close, merge or restrict their offerings. A 2014 Mercatus Center survey found that many small banks were stopping mortgages because of Dodd-Frank and nearly 3 in 4 said the CFPB was affecting their business. Additionally, because small banks provide the bulk of loans to small businesses and agriculture in the country, their struggles contributed to meager job creation and weak economic recovery during the Obama years.

The respect. When the CFPB prototype was first proposed nine years ago, I wrote in these pages that the architects of the new agency should “treat borrowers like adults”. Instead, Mr. Cordray’s CFPB viewed consumers as too stupid, irrational, or vulnerable to make their own decisions about entering a contract with an arbitration clause, taking out a payday loan. or negotiating a car loan with a car dealership.

Protecting consumers against unfair and deceptive actions by financial institutions is the main mission of the CFPB. But not all consumers who don’t pay their bills are unfortunate victims. Smarter regulation would recognize that. During the financial crisis, for example, millions of borrowers gave up mortgages they could afford to pay just because they were under water. But the CFPB mortgage rules are designed only to ensure that borrowers have the capacity to pay; they do not consider precautions such as requiring larger down payments that would reduce the incentive to strategically default when house prices fall. As a result, despite imposing billions of dollars in regulatory compliance costs, there is no evidence that CFPB rules would have significantly reduced foreclosures had they been on the books during the housing crisis.

Mr. Mulvaney has taken decisive steps to reform the CFPB. Now comes the most crucial step: building a financial consumer protection framework that restores the rule of law and contributes to economic prosperity.

Mr. Zywicki is Professor at the Antonin Scalia School of Law at George Mason University and former Director of the Policy Planning Office of the Federal Trade Commission.

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