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Why consumer agency must go, and why it should be saved

If the Consumer Financial Protection Bureau disappeared tomorrow, would anyone notice?

What is expected to be a contentious Senate Banking Committee confirmation hearing Tuesday for Rich Cordray, who has been temporarily leading the bureau, offers an opportunity to examine the need for a federal agency designed to protect consumers in their financial dealings. If confirmed, Cordray gets a five-year term, but he’s certain to face a major fight from Republicans, who say the bureau is ill-conceived. We spoke to one of the agency's biggest supporters and perhaps its fiercest opponent to get some perspective. But first, a little background:

Born out of the financial crisis, the first new federal consumer protection agency since the Depression, the CFPB has had a rocky start. Republicans railed against the idea but couldn't stop Democrats from passing the financial reform legislation that created it, so instead they blocked appointment of Cordray in 2011, effectively putting the bureau into limbo. President Barack Obama then used a recess appointment to seat Cordray, setting off a battle that is still going on.

The political dispute didn't stop the bureau from shooting out the gate, however. It its 15 months of existence, it has written a host of new rules for lenders, set up a huge public database of consumer complaints and generally irritated most of the financial industry.

Many in the banking industry are still hopeful they can dismantle the CFPB, unseat Cordray and potentially undo everything the bureau has accomplished with a single court victory.

A federal court ruling in January found that another recess appointment by Obama was improper, creating the possibility that it might agree with Republicans who argue Cordray’s recess appointment was illegitimate, too. Some opponents argue that would make everything the bureau has done since his appointment void.

Expect bickering

That legal battle is still in the future, but Tuesday's confirmation hearing serves as a proxy for the fight and another chance for political posturing by both sides. There will be plenty of "Your regulations are killing jobs" vs. "Do you want a repeat of the 2008 recession?" bickering.

The discussion has potential to be a little more elevated, however, as this time the CFPB has a track record to examine.  As far as federal agencies go, it's just  a baby. But as long as we're fighting about it, it’s worth asking what the CFPB has done to prove its worth. 

In one corner ...

Todd J. Zywicki, a law professor at George Mason University with expertise in bankruptcy and contracts, says the CFPB has become exactly the monster he predicted three years ago when Congress debated its creation.

"It's turned out to be an extremely political agency,” he said. “... It's turned out to be really aggressive and arrogant in the way it behaves.”

When one of Obama’s recess appointments was invalidated, the agency response was "typical,” he said.

"They said that ruling doesn't apply to us,” Zywicki said. “What that shows is an agency that is very arrogant and out of control.”

The CFPB has unusual power among federal agencies. Unlike the Federal Trade Commission, the Federal Communications Commission and other agencies which are run by members of a commission with mixed political affiliations, the CFPB has a single agency head. It also does not have to submit its annual budget for congressional review the way other regulators must.

"They've created an unaccountable super-regulator that can and has acted as a highly political agency," Zywicki said. "If the CFPB were to go away tomorrow, it would be a boon for consumers and the economy."

Zywicki's most specific concern about the agency before its creation was that it would hurt lenders, and therefore hurt  consumers who were trying to borrow money. That has happened, he said.

"Our concern from the beginning was that it would act in a manner that would restrict credit and hurt the economy," he said. "Look at its rules on qualifying for mortgages (which impose stricter requirements on borrowers). ... It's stifling innovation (by banks) and restricting consumer choices."

He also said that the agency's new rules are disproportionately impacting the nation's smaller banks, which have smaller legal staffs to deal with them.  

"Because of the massive regulatory burden it is imposing on the economy, (the agency) is promoting a consolidation of the banking industry" by burdening small banks, Zywicki said. He could not point to a bank that closed or was sold because of CFPB rules but said that smaller community banks across the country are consistently complaining about the rules.  "It's the overall effect of regulations," he said. "It's not just the CFPB, but it is piling on."

And in the other ...

Taking the opposing view is Ed Mierzwinski, consumer program director for the consumer advocacy agency Public Interest Research Group and a vocal supporter of the CFPB creation and of Cordray. He gives the agency an "A-minus" for its work so far and has no trouble rattling off a list of accomplishments in its short life. Among them, he said, the bureau has:

  • Successfully brought enforcement cases against three large credit card issuers for allegedly unfairly "upselling" products such as credit card insurance, and returned $400 million to 6 million U.S. consumers after a settlement.
  • Created new mortgage disclosure documents, promoted awareness among college students about school loan debt and launched a separate effort to protect soldiers and veterans from predatory lenders, all through its “Know Before You Owe” program.
  • Become the first federal agency to supervise so-called “non-bank banks” and begun to focus on products such as payday loans, title loans and other non-traditional borrowing products, as well as private student lenders.
  • Worked to increase transparency, including creation of a public disclosure website that lists consumer complaints and, unlike similar databases at other agencies, allows anyone to browse the complaints, including information on the companies targeted.  Agencies such as the Federal Trade Commission do not make complaints pubic.

"The CFPB data allows (observers) to rank the companies involved. No one wants to be No. 1 on that list," Mierzwinski said. Public shaming is an effective regulatory tool, he argued, one that hasn't been used by other agencies.

When asked about the theoretical possibility that the agency could disappear, Mierzwinski said consumers would lose the benefit of actions he expects in the next 15 months, specifically related to the CFPB's recently acquired new power to regulate credit bureaus and debt collectors.

"The FTC never had the tools to go after them,” he said. “... Now for the first time, a federal agency can go into the credit bureaus and debt collectors and say, 'Show me your books.'"

Mierzwinski said the FTC has never held the credit bureaus financially accountable for credit report errors and predicted CFPB enforcement would lead to more accurate credit reports.

In a more general way, he says enforcement actions and additional regulatory oversight help all consumers, even if they haven't received a refund check based on a bureau lawsuit.

"I'm convinced that many banks eliminated those kinds of practices," such as selling credit card insurance, after a CFPB lawsuit,” he said.  "So going forward, you will see fewer unfair offers from banks. ... If you have a mortgage, going forward your servicing rules will be fairer."

Mierzwinski’s chief argument for preserving the CFPB: All other banking regulators are charged with simultaneously protecting the safety and soundness of banks on one hand, while mandating fairness to consumers on the other. That's why, for example, excessive overdraft fees were allowed for years -- when regulators weighed the interests of making banks profitable against treating consumers fairly, they often chose the former. 

"They had a conflict of interest ... and often sided with bank safety over consumer protection," Mierzwinski said.

Zywicki, the CFPB critic, said he isn't fundamentally opposed to a consumer protection agency focused on financial products, but he says he believes evidence shows that Cordray's agency is acting recklessly.

"They made a political decision that the entire financial crisis was a consumer protection problem, ignoring evidence that there were other causes," he said. "I see no indication to date that they have a serious understanding of economics or unintended consequences. Sure, there are concerns about these products. People misuse mortgages. But their behavior to date raises questions about how seriously they take economic evidence."

He disagreed that payday and other non-traditional lenders had slipped through regulatory cracks before creation of the CFPB -- they were regulated at the state level, he noted. And even in this area, he said he was concerned about the new agency's actions against high-interest lenders. 

"The concern is the same, that they will blunder based on their belief in what's going on, rather than use sound economic science,” he said. “By over-regulating those products, they could drive them out of business and could end up hurting consumers. ... Before we had alternative lending products ... we had loan sharking. We could end up there again."

It works, or it doesn't

While Zywicki wouldn't mind a dismantling of the agency, his preference would be a radical restructuring, with Corday replaced by a slate of mixed-party commissioners with less power.

"The optimal solution is a more accountable, more reasonably constructed agency along the lines of the FTC," he said. "We've been doing independent regulatory agencies for a century, and we know what works."

But Mierzwinski said the housing bubble and the recession show that the system that was in place didn't work, and says he fears that a diluted CFPB wouldn’t be able to take firm action against the powerful financial services industry.

"We would lose … the one regulator that has protecting consumers as its only job," he said. "Payday lenders could run roughshod over American consumers again without the CFPB, and credit bureaus wouldn't be brought into line."

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