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Today marks the fifth anniversary of the existence of the Consumer Financial Protection Bureau, a government agency created by the Dodd-Frank Act to look out for consumers in the financial marketplace. Unfortunately for consumers, the Bureau has spent much of those five years on activities that have reduced opportunities for consumers, made credit less available and more expensive, and distorted well-functioning markets.
It is not too late to change course. Here are five ideas for reforming the Bureau so that it can more faithfully carry out its important consumer protection mission over the next five years.
- Stop establishing de facto regulations through enforcement actions and consent orders
Businesses need clear rules of the road to operate and serve their customers well. In many cases, those rules are established in law or written regulation that has gone through the Administrative Procedure Act process, which invites public notice and comment. The Bureau has preferred instead to establish standards by entering into a consent order with a particular company based on a unique set of facts and then expecting all other companies to abide by the terms of the consent order. That process is not only unfair but it blurs the rules of the road for all companies conscientiously trying to abide by the law as they struggle to determine how and to what extent those fact-intensive consent order terms apply to them. As we suggested in a March 31 letter to the Bureau, the Bureau should abandon that practice in favor of a standard-setting process that allows for meaningful input from stakeholders and the public.
- The Bureau should consider the cumulative impact of its regulations on consumers on the margins of the credit economy
Many of the products and services the Bureau has regulated or has said it wants to regulate are used by un- or under-banked consumers to manage family budgets. For many consumers, access to these products makes a difference for their ability to buy groceries this week or make the next car payment. The Bureau either presently regulates or plans to regulate these products, which include overdraft protection, prepaid reloadable cards, and many small-dollar short-term loans. As we explained in a June 14 blog, the cumulative impact of these regulations will have a significant impact on consumer and household liquidity. The Bureau should consider the aggregate impact of regulations, especially on consumers at the margins of the credit economy, and work to preserve the availability of these products on competitive terms and at efficient, market-based prices.
- The Bureau should preserve the availability of fair, low-cost arbitration for consumers, not replace it with the broken class action system
In March 2015, the Bureau reported its study on the use of arbitration agreements in consumer financial contracts to Congress, as required by the Dodd-Frank Act. The study concluded that arbitration is a low-cost, efficient dispute resolution mechanism for the types of claims consumers care about the most. The study also demonstrated that class action, in contrast, benefits a tiny fraction of eligible class members to the tune of $32. Nevertheless, as we explained in remarks at a Bureau field hearing on May 5, the Bureau presently plans to issue a regulation that would have the practical effect of eliminating company-subsidized arbitration for consumers. The Bureau should abandon this effort so that consumers retain access to effective means for resolving disputes.
- The structure of the Bureau should be changed to allow more meaningful congressional oversight and to ensure regulatory continuity
Many observers have opined that the Bureau is the most unaccountable agency of government because it is headed by a single director, in whom all of the Bureau’s power is vested, and is not funded through congressional appropriations. These features significantly reduce the ability of Congress to conduct oversight or change the Bureau’s course when it conflicts with the will of the American people as expressed through their elected representatives. The single-director structure also means that the next director could come in and radically change the Bureau’s regulatory program in an instant. The Bureau should instead be run by a commission, much like the SEC or CFTC, and should receive its funding from Congress. These reforms would not only ameliorate concerns about the Bureau’s insularity but would also improve the quality of the Bureau’s regulation as more viewpoints are considered in the standard-setting process.
- The Bureau should take aggressive steps to eradicate intentional discrimination in the consumer financial marketplace and stop relying on “disparate impact” theory
Intentional discrimination is not only morally repugnant, but it is against the law. No consumer should suffer discrimination on the basis of race, gender, or any other protected characteristic. But the Bureau has consistently used “disparate impact” as conclusive proof of unlawful discrimination under the Equal Credit Opportunity Act, even in cases where the lender or underwriter is statutorily prohibited from knowing a borrower’s race or gender. Worse, as we described in a prior blog, the Bureau has relied upon a computer algorithm—not verified data—to guess the race of borrowers and pursue enforcement actions against companies it alleges have violated the law. Over the next five years, the Bureau should limit its focus to rooting out intentional discrimination and abandon its improper use of “disparate impact” theory.