How to improve regulations at CFPB


When the Consumer Financial Protection Bureau (CFPB) was established in 2010 under the Dodd-Frank Act, it was supposed to be a “21st century agency” that used solid data and analytics to develop regulations. well designed. Despite all these promises, the office did not keep its commitments.

To date, the rules of the Bureau – such as the rules concerning arbitration, prepaid cards, and payday loans– were not based on solid research or on consumers’ desire for regulation. Instead, they were motivated by the ideological hostility to the financial services sector.

Take the payday loan rule. The Bureau began reviewing the payday loan market in January 2012 for regulation. It was just six months after the agency officially opened, even as it dealt with the enormous task of setting up a new government agency and writing new rules, and despite the lack of a mandate Congress or consumer complaint data at the time.

Worse, the consumer complaints database administered by the Bureau reports that payday loans accounted for 1 percent of all consumer complaints, while auto title loans, which were also included in rule-making, accounted for 0.1 percent of all complaints. This type of data theoretically guides the development of Bureau rules; it is not convincing that there was never a consumer protection problem to begin with.

Because Congress delegates such immense legislative power to the Bureau while abdicate oversight of its operations, it is particularly important for consumers, businesses and democratic governance that the CFPB puts in place an accountable and transparent rule-making process.

In the absence of legislative changes, the onus of improving the accountability, transparency and integrity of the agency rests with the Office itself. That’s why it’s heartening that Acting Director Mick Mulvaney is seeking public comment on a the full range of office operations, including its regulatory process, for which CEI comments submitted this week.

We have a number of ideas on how the Bureau could improve its rules. For example, the Bureau relies too much on behavioral economics (BE) to justify regulation. However, very few studies demonstrate beyond a theoretical level that cognitive consumer biases exist or are prevalent in the market, let alone whether government intervention can solve such a problem.

Interestingly, although the Bureau seems to believe BE’s ideas are new, they are not fundamentally different from other paternalistic arguments. The idea that consumers are being manipulated into making credit decisions that are not in their best interests has has been around for centuries.

For much of the 20th century, for example, consumer credit was only seen as appropriate for rich men, such as women and the poor.
considered not to be “cognitively able” to use credit responsibly.

Likewise, the Bureau has used BE to claim that consumers are not “cognitively adept” enough to understand even the most basic financial products. This, of course, leaves it to the enlightened CFPB bureaucrats to decide what is right and wrong for consumers. It is not difficult to understand why behavioral economics can be seen as little more than the “applied theory of people’s patronage”, as economist Deirdre McCloskey I described it.

Another major problem is the Bureau’s cost-benefit analysis. To date, the analysis provided for the proposed rules has been totally inadequate. To take the payday loan rule as another example, the analysis provided by the Bureau did not offer any serious cost collection, quantification and analysis, while simply providing abstract qualitative benefits to the proposed settlement.

One of the most egregious examples is that the Bureau is ignoring the fear that consumers will turn to black market lenders when they cannot access legal loans. On a 1,700-page ruler, the concern was addressed in a single footnote, despite wealth of evidence to suggest that black market lending will only increase with the new regulations.

The Bureau must take its cost-benefit analysis more seriously. The creation of a cost analysis office go far improving the Bureau’s rule-making process.

Given the structure of CFPB, with an all-powerful director who can unilaterally shape much of its operations, Acting Director Mulvaney has immense authority to institute more stringent regulatory requirements. We offer a number of specific suggestions for reform in our comments, comprising:

· Put the Bureau on a regulatory budget;

· Take a closer look at the effects of regulation on financial innovation;

· Create a more transparent rule-making process by allowing third parties to access economic data and methodology;

· Carry out a rigorous cost-benefit analysis of existing regulations;

· Include sunset clauses in discretionary rules;

· Liaise with Small Businesses to communicate and coordinate rules with the Small Business Administration; and

· Prioritize required rules over discretionary rules.

The development of Bureau rules should be guided by well documented, fully justified and properly designed rules that implement the intent of Congress in the most effective manner possible. Unfortunately, this has largely not been the case. Acting Director Mulvaney has the opportunity to mend this interrupted process.


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