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The CFPB and Consumer Welfare

posted by Adam Levitin
David Evans has an interesting article on PYMNTS that argues that "The fundamental problem with the CFPB ... isn’t who’s on top. It is that the CFPB does not have an institutional desire, or incentives, to make sure that the financial services industry supplies consumers with products that consumers need, including loans.” It’s refreshing to hear a CFPB critic argue that the issue isn’t really with the CFPB’s structure, but with its worldview. But Evans is still wrong.  
Evans' argument is that the CFPB’s regulations are constraining credit, particularly from alternative financial services (payday, auto title), to those who need it most, the economically hard-pressed lower-middle class. This is basically the 2d lowest income quintile (which Credit Slips readers might recognize that the prime demographic for consumer bankruptcy filings—people with some income and assets—not the poor—but not enough to manage all of the curveball life throws.) There’s no question that the lower-middle class is feeling an economic squeeze, and has been for some time. This is what Elizabeth Warren documented very well in The Two-Income Trap and Jacob Hacker covered in The Great Risk Shift.  The problem this demographic faces is falling real incomes and rising expenses, especially from housing, health care, education, and child care. That’s a structural problem. The idea that more credit is somehow a solution is baffling. Access to credit isn’t a solution to the lower-middle-class’s economic problems. It’s a stopgap measure, and far too often the terms of that credit just mean that the consumer avoids one problem today at the cost of a much bigger one tomorrow. The CFPB cannot fix the structural economic problems of the lower middle class. That will require massive reforms in a number of areas beyond consumer finance, and even that might not be enough. All the CFPB can do is try to make sure that credit isn’t a “cement life raft” as Elizabeth Warren put it in The Two-Income Trap. Basically Evans is tagging the CFPB for not solving a problem it isn’t designed to fix.  

Specifically, Evans suggests that the problem is that the "CFPB, is not designed institutionally to maximize the net consumer benefits from consumer financial services. It is designed to minimize consumer problems by, if necessary, effectively prohibiting products that harm some consumers some of the time.” While the CFPB isn’t set up for solving the structural economic problems of the lower-middle class, Evans statement about the CFPB’s institutional design is incorrect.  

I can’t overemphasize what nonsense the CFPB-caused credit-constraint meme is. To date the CFPB has not issued a blanket prohibition against any type of product. The only thing it has directly prohibited is making certain loans without regard to a borrower’s ability to repay. That’s just saying that lenders have to engage in Lending 101 (and in the case of mortgages and credit cards, it was Congress that put the prohibition into place, not the CFPB.)  Moreover, the ability-to-repay requirement has all sorts of carve-outs, exceptions, and safe harbors. The QM mortgage rules allow for non-QM mortgages, just without a safe harbor. The CARD Act rules limit a bunch of sharp practices, but it hardly prohibits credit card lending. The proposed payday rule allows for payday loans that meet certain requirements. The remittances rule is basically a disclosure requirement. So I’m just not seeing where the CFPB is “effectively prohibiting products that harm some consumers some of the time.” The only thing I can think of is that Evans is arguing about the scope of the proposed Payday Rule, but that’s one rule. It’s not fair to make a claim about the agency writ large based on one, non-finalized rule (that does allow for payday and title lending, just with various limitations). There's not one iota of evidence that the CFPB's actions have resulted in a material change in credit availability.
Indeed, if you want to point fingers about constrained access to credit, the CFPB is hardly the obvious place to start. There are a lot of other pieces moving in the financial regulatory space. The place to start would be the Fed and its monetary policy, and then from there go on to various bank regulators’ policies and Fannie and Freddie underwriting standards. I don’t know of one solid study that connects CFPB regulations and a constriction in credit using anything other than a post-hoc ergo propter hoc logic that doesn’t actually show a casual relationship. (For examples of two really badly done studies that do not prove any causal relationship, see here and here.) 
Evans' claim about the CFPB’s focus is based on an incomplete view of the CFPB. He focuses solely on rulemaking and enforcement, which will inevitably give a warped view the CFPB’s activity because rulemaking and enforcement are, by definition, about cracking down on bad practices, not promoting good ones. But the CFPB has done a lot of amazing—and really unprecedented—consumer education work, ranging from outreach programs (including a very successful liaison with the armed services) to some incredible web tools (including a native-language Spanish site—no Google Translate here). This is work that is all about helping consumers maximize the benefits of consumer financial services. It doesn’t grab headlines the way enforcement work does, but it is an important part of what the CFPB has been doing.  
Evans also ignores the CFPB is formally charged with "ensuring that all consumers have access to markets for consumer financial products and services”. That’s the first part of the CFPB’s mission. That includes both enforcement of fair lending laws (the “all” consumers part), but also trying to further access. That’s what the CFPB has done through Project Catalyst (a sort of consumer finance lab with a regulatory safe harbor to encourage experimentation) and through proposed regulations like the Payday Rulemaking that would allow payday loans that comply with the NCUA’s small dollar lending program.  
Additionally, Evans also overlooks the connection between cracking down on bad practices and promoting good ones. Businesses engage in sharp practices for only one reason—because they are profitable. They don’t do so out of spite or for kicks. So imagine if you’re a good apple trying to compete against the bad ones. If you price your products clearly and fairly, you’ll lose business to the sharp actors that obfuscate the costs of their products. The result will be a race to the bottom. If cracking down on bad practices enables the good practices. Minimizing consumer problems by prohibiting harmful products actually maximizes net consumer benefits.  The goal is not simply to foment the provision of credit, but to foment the provision of good quality lending. More lending isn’t a boon if it is not sustainable.   
Still, suppose that Evans is right.  What could be done to change things? If the problem is with the CFPB’s institutional desires or incentives to promoting lending, it’s hard to see how the milquetoast suggestions put forth by Evans of ensuring that there is leadership that “recognizes the value of consumer financial services products for people in diverse economic circumstances,” “cost-benefit analysis of regulations, and “accountability”, are going to have any effect. Instead, if the problem is that the CFPB isn’t doing enough to promote lending, there are a much more obvious and direct set of tools:  require lenders to make loans. That clearly isn’t what Evans (or anyone else) has in mind.  No one wants the CFPB to be forcing lenders to make loans. So what does Evans want then? He wants the CFPB to simply leave lenders alone to make the loans they want to make. As much as Evans says that he is against fraud and deception and wags his finger as Wells Fargo, this points to what Evans really wants at the end of the day:  a do-nothing CFPB. Everything else in this exercise is just noise.  
For sake of completeness, however, let me turn to Evans’ three recommendations and point out what is wrong with them:
(1) appointing commissioners … that recognize the value of consumer financial services products for people in diverse economic circumstances  …. [and] (3) making the agency accountable for its overall impact on consumers of financial services products.  
Evans argues that "The commission approach is appealing because it enables a diverse group of professionals to provide checks and balances on each other. Most importantly, it promotes stability and certainty in the regulatory approach.” Neither of these arguments hold water.
First, with a 5-member commission, 3 members will be from one party (and this is assuming that all 5 positions are filled). The majority can simply out-vote the minority.  Where is the check or balance there? There’s only a check or balance if one assumes (a) partisan politics will shape voting and (b) that of three Democrats on a commission one will be a Mary Jo White type, who is aligned with the financial services industry. That might often be the case, but it need not always be.
Second, the fact that 3 can out-vote 2 means that there’s no guaranty of stability and certainty. Staggered terms might, all else being equal, promote some stability, but agencies can’t reverse rule makings willy-nilly. They have to go through the Administrative Procedures Act process, which will require a good basis for the change in policy, not just partisan politics. Enforcement emphases might change, but that’s as much in the control of the commission chair as it is for a single Director. Simply put, the arguments for a commission don’t engage very deeply with administrative agency realities.  
The accountability argument for a commission structure also doesn’t stand-up upon close inspection. The idea is that a multi-member commission (somehow) promote accountability. Jiggery-pokery. Are 5 commissioners possibly more accountable than a single director? Of course not. And are they less likely to act in an arbitrary and capricious manner? No—they are more likely to engage in political deal-cutting that arrives on arbitrary compromises, rather than the right policy. And if three are from the same party, they can pursue whatever agenda they want.  
Accountability might also be a code word for “appropriations”, but that’s a different matter. Is an agency really more accountable because it is subject to appropriations?  Hardly. The appropriations process works differently than the regular legislative process and is one of the least transparent parts of law making. There might be some accountability to Congress from appropriations, but what about to the American people? In a world of gerrymandered Congressional districts and parliamentary procedure, it is hard to see how appropriations creates real accountability. Moreover, consider how appropriations riders work. There are "legislative" riders that enact new legislation. And there are  "limiting" riders that limit how funds can be spent. But I've never seen a rider that mandates that an agency undertake a particular rulemaking or up its enforcement actions. Appropriations riders are a one-way ratchet.  One-way ratchets are not about accountability.  They are about deregulation and nothing more.  
In any event, shouldn’t the goal for government agencies be effectiveness, not “policy stability” or “checks and balances” or "accountability"? The whole reason we have administrative agencies (not envisioned in the Constitution) is that they are a more effective mode of governing than Congress trying to do everything itself. An accountable, but ineffective agency is worthless. Thus, the question is really whether agencies with commission structures tend to be more effective than those with single director structures. That seems easy. Compare the OCC and CFPB with the SEC and FTC. The SEC and FTC have often been less-than-effective regulators in part because of the commission structure (and also in part because of lack of budgetary independence). The push for a commission structure is about nothing more than ensuring less-than-effective regulation, and then being able to turn around and blame “big government” for failing to work.   
But insofar as Evans is just asking for CFPB leadership (in any form) understands that different consumers need different products, I don’t think there’s an argument to be had there. Different consumers have different needs, and the CFPB has already been pretty flexible about this, such as in allowing balloon mortgage structures on rural mortgages. But just because consumers don’t all have the same needs does not mean that there is a virtue in having unlimited product variation. The thing that the consumer finance industry dreads is commoditization—after all this is, at the end of the day, just money—because commoditization means lower profits. But from a consumer welfare perspective, commoditization of products is one of the best things possible for precisely the same reason—it means more vigorous head-to-head competition. So I would argue that while it is important to recognize that different consumers need different products, it is also important to recognize that not all product differentiation is about meeting consumer demand; part of it is about making it harder to compare products on an apples-to-apples basis.
(2) mandating that the regulations maximize economic welfare after accounting for benefits and costs;
Evans also bangs on a cost-benefit analysis drum, which is a popular conservative, anti-regulatory meme. It’s also a pretty silly one when one actually thinks about it. On the surface, who could object to the idea of cost-benefit analysis?  But as applied, it gets much messier. First, most of the numbers involved in any analysis are basically made up.  It’s not serious science. As John Coates has shown, in the context of financial regulation, cost-benefit analysis is at best a "guesstimate." Second, what do we do when a regulation benefits some consumers and harms others? There’s no particularly principled way to navigate this. Do just treat all consumers as the same and try to net things out? Do we place more emphasis on the harm or benefit to consumers with fewer economic means (and therefore less ability to self-insure against risks)? And all of this is leaving out the problem of systemic risk, which is incredibly hard to weight into the system because it is a small chance of a catastrophic failure (but really hard to know just how catastrophic). Finally, shouldn't we be applying the cost-benefit metric to the cost-benefit requirement itself? If we did, it's hard to see why we would require cost-benefit analysis when the numbers are speculative, the costs of doing the analysis itself are real, and more importantly, there is a real risk that bad cost-benefit analysis will result in the failure to regulate when we should. Cost-benefit analysis, like everything else is Evans' argument, is nothing more than a gussied up anti-regulatory agenda. 


Well, we should start by looking at Mr. Evans' organization and who it works for. It's not surprising that his piece is pro-industry.

He says the CFPB "errs on the side of making sure that people who get credit don’t get hurt" like making sure people don't get hurt is a bad thing. In Evans' zero-sum world, in order to provide consumers access to the credit they allegedly need, we will just have to tolerate the fact that lenders are putting out "products that harm some consumers some of the time."

And don't even get me started about the silliness of using entrepreneurs financing startup costs on personal credit cards as a justification for why we need payday and title loans at 300% APR.

It sounds like Evans is only interested in consumer protection as a way of demarcating a line between greed and piggishness, and providing a safe space for the former. It's OK to shackle a payday loan borrower to an endless cycle of rollovers. It's OK to offer non-transparent loan terms and gotcha fees. Just don't embarrass us all by doing things like opening actual fake accounts. We might need to have a show trial or two.

This is just another example of agency capture. Institutions that are intended to protect consumers are ultimately beholden to private industry. Then when things go wrong, people wonder what happened. Many plaintiff’s attorneys would be out of a job if government agencies were able to do their jobs more effectively.

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