The CFPB Makes Its Case

CFPB Director Cordray

The Consumer Financial Protection Bureau released its Semi-Annual Report. Given that the Bureau is under attack by Republicans in Congress and in the Trump Administration, one can read this as a defense (a strong defense, I might editorialize) for the work that the Bureau has done on behalf of consumers. The core of the Bureau’s argument is that it levels the playing field for consumers when they deal with financial services companies:

The Bureau has continued to expand its efforts to serve and protect consumers in the financial marketplace. The Bureau seeks to serve as a resource on the macro level, by writing clear rules of the road and enforcing consumer financial protection laws in ways that improve the consumer financial marketplace, and on the micro level, by helping individual consumers get responses to their complaints about issues with financial products and services. While the various divisions of the Bureau play different roles in carrying out the Bureau’s mission, they all work together to protect and educate consumers, help level the playing field for participants, and fulfill the Bureau’s statutory obligations and mission under the Dodd-Frank Act. In all of its work, the Bureau strives to act in ways that are fair, reasonable, and transparent.

*     *     *

When Federal consumer financial protection law is violated, the Bureau’s Supervision, Enforcement, and Fair Lending Division are committed to holding the responsible parties accountable. In the six months covered by this report, our supervisory actions resulted in financial institutions providing approximately $6.2 million in redress to over 16,549 consumers. During that timeframe, we also have announced enforcement actions that resulted in orders for approximately $200 million in total relief for consumers who fell victim to various violations of consumer financial protection laws, along with over $43 million in civil money penalties. We brought numerous enforcement actions for various violations of the Dodd-Frank Act and other laws, including actions against Mastercard and UniRush for breakdowns that left tens of thousands of economically vulnerable RushCard users unable to access their own money to pay for basic necessities; two separate actions against CitiFinancial and CitiMortgage for keeping consumers in the dark about options to avoid foreclosure; and against three reverse mortgage companies for deceptive advertisements, including claiming that consumers who obtained reverse mortgages could not lose their homes. We also brought two separate actions against credit reporting agencies Equifax and TransUnion for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers, and for luring consumers into costly recurring payments for credit products; and an action against creditor reporting agency Experian for deceiving consumers about the usefulness of credit scores it sold to consumers. The Bureau also continued to develop and refine its nationwide supervisory program for depository and nondepository financial institutions, through which those institutions are examined for compliance with Federal consumer financial protection law. (10-11, footnotes omitted)

Anyone who was around during the late 1990s and early 2000s would know that consumers are much better off with the Bureau than without it. This report provides some of the reasons why that is the case.

Running Circles around the CFPB

Lauren Willis has posted The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension to SSRN.  It addresses an important subject — the cat and mouse game of the regulator and the regulated. The abstract reads,

To ensure that consumers understand financial products’ “costs, benefits, and risks,” the Consumer Financial Protection Bureau has been redesigning mandated disclosures, primarily through iterative lab testing. But no matter how well these disclosures perform in experiments, firms will run circles around the disclosures when studies end and marketing begins. To meet the challenge of the dynamic twenty-first-century consumer financial marketplace, the bureau should require firms to demonstrate that a good proportion of their customers understand key pertinent facts about the financial products they buy. Comprehension rules would induce firms to inform consumers and simplify products, tasks that firms are better equipped than the bureau to perform. (74)

The Bureau has worked hard to tackle financial education in a meaningful way, but Willis is right that this is a Herculean task given the profit incentive that financial institutions have to run circles around consumers and the Bureau itself. Willis explains

the feebleness of mandated disclosures, the inherent flaws in the alternatives the CFPB has been pursuing, the advantages firms have over regulators in ensuring their customers’ comprehension, and the CFPB’s legal authority to require customer confusion audits and enforce comprehension rules. I then elaborate on a few examples of how this form of regulation might operate in practice, including these four key elements:

1. Measuring the quality of a valued outcome (comprehension) rather than of an input that is often pointless (mandated or preapproved disclosure);

2. Assessing actual customer comprehension in the field as conditions change over time, rather than imagining what the “reasonable consumer” would understand or testing consumers in the lab or in single-shot field experiments;

3. Requiring firms to affirmatively and routinely demonstrate customer understanding, rather than relying on the bureau’s limited resources to examine firm performance ad hoc when problems arise ; and

4. Giving firms the flexibility and responsibility to effectively inform their customers about key relevant costs, benefits and risks through whatever means the firms see fit, whether that be education or product simplification, rather than asking regulators to dictate how disclosures and products should be designed. (76) (footnotes omitted)

Hopefully the Bureau will take a serious look at Willis’ critique.  It is important, of course, to get consumer financial literacy right in order to benefit consumers directly. But it is also important for the Bureau to get it right in order to protect its reputation as an effective regulator that brings real value to the consumer finance sector.