Consumer Financial Protection Bureau: Limiting Americans’ Credit Choices

By Diane Katz of The Heritage Foundation. Excerpts:

"The Consumer Financial Protection Bureau (CFPB) was established under Title X of the Dodd–Frank Act to regulate consumer financial products and services. The bureau wields unparalleled rulemaking, supervisory, and enforcement powers, and operates without accountability to Congress or the executive branch. Its theoretical framework is paternalist, deeming consumers to be fundamentally irrational and prone to act against their self-interest. Under this paradigm, regulatory intervention is necessary to protect consumers from themselves by limiting the availability of credit, and curtailing Americans’ choices for investment and wealth creation. This result is a calculated departure from the principles that governed consumer protection law for decades."

"In the words of Oren Bar-Gil and Elizabeth Warren, the academic architects of the bureau, consumers suffer “cognitive limitations” and their “learning is imperfect.”[6 ]Indeed, the bureau takes the position that “too much information” can “detract from consumers’ decision-making processes.”[7] Under this paternalist paradigm,[8] regulatory intervention is necessary to protect consumers from themselves by limiting complex credit options and standardizing “qualified” loans."

"If consumers suffer cognitive limitations with respect to financial matters, would the politicians and bureaucrats who dictate the terms and conditions of credit not be afflicted by biases of their own, most notably political and institutional incentives? As noted by economist Edward Glaeser, “Human beings surely make mistakes about their own welfare, but the welfare losses created by these errors are surely second order relative to the welfare losses created by governments which not only make errors, but also pursue objectives far from welfare maximization.”[9] Indeed, the bureau’s very existence is rooted in the lapses of seven other regulatory behemoths that were supposed to protect the nation from financial calamity."

"(CFPB officials also claim to have “streamlined” the mortgage process, although the new rules encompass a whopping 1,888 pages.) There are new restrictions on credit cards, ATM services, auto lending and leasing, electronic funds transfers, and student loans."

"The bureau was designed to evade the checks and balances that apply to most other regulatory agencies. Although established within the Federal Reserve System, the bureau operates independently, with virtually no oversight. CFPB funding is set by law at a fixed percentage of the Federal Reserve’s operating budget."

"the agency may also supervise any nonbank firm that it deems as posing a “risk” to consumers or engaging in “unfair, deceptive, or abusive” practices.[19] While the terms “unfair” and “deceptive” have been defined in other regulatory contexts,[20] the term “abusive,” has not been defined in law and thus grants the CFPB inordinate discretion."

"there is no description in Title X of what constitutes risk."

"the bureau acts upon a supposition of future harm rather than actual violation of law."

"Examiners are also expected to determine the likelihood that a supervised entity will not comply with federal consumer financial law in the future...Companies may be penalized for conduct that they had no reason to believe was improper."

"
The bureau’s authority to protect consumers from “abusive” practices is likewise vaguely defined. Title X of Dodd–Frank characterizes as abusive any action that:

1. Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
2. Takes unreasonable advantage of: 
•  a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
• the inability of the consumer to protect his interests in selecting or using a consumer financial product or service; or
• the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

How can the CFPB determine consumer “ability” or the requisite degree of consumer “understanding” for an exceedingly diverse population? In effect, the bureau is regulating the finance sector based on a notional assessment of consumers’ aptitude and their presumed inability to make rational decisions about their personal finances.

The agency has issued neither guidance nor rules to define abusive practices, nor have officials shown much willingness to provide clarity—even when asked explicitly to do so by Congress."

"The CFPB is not required to possess evidence of wrongdoing before initiating a probe."

"Of the $342 million in civil penalties collected between 2012 and 2015, just $190 million (55 percent) has been used to compensate victims.[28] Another $13 million has been used for “consumer education and financial literacy” when victims could not be located or payments were “otherwise not practicable.”"

"Although already in possession of a massive amount of consumer financial data, the CFPB recently increased data collection requirements for lenders under the Home Mortgage Disclosure Act (HMDA). Dodd–Frank mandated some new data collection, but the bureau has vastly exceeded those provisions with its new 797-page rule.[40] Instead of just nine data fields, lenders will have to report 45 separate data points about mortgage applicants, borrowers, and the underwriting process; the property that is securing the loan; features of the loan; and other unique identifiers"

"“Payday” Lending. A total of 48 states already regulate payday lending, and yet the CFPB is proposing to dramatically limit the availability of small-dollar, short-term loans.[65] The proposed payday rules would limit the interest rates that payday lenders can charge, prohibit borrowers from taking out more than one loan at a time, and require lenders to assess the borrower’s ability to repay. In effect, the regulations would make it difficult, if not impossible to offer this type of loan, which would have a disparate impact on the low-income households and immigrants who rely on them.
According to Heritage Foundation Research Fellow Norbert J. Michel, the CFPB’s own complaint database does not support the claim that there is a systemic problem in this industry.[66] From July 2011 to August 2015, Michel noted, consumers lodged approximately 10,000 complaints against payday lenders. Ignoring the fact that these are unverified complaints, the figure pales in comparison to the more than 12 million people per year using payday loan services.

There is a great deal of misinformation spread by critics about small-dollar loans. One of the most common claims is that payday lenders gouge customers by charging a high annual percentage rate. Such criticism is misplaced, in part because it misuses the APR concept.[67] Properly used, the APR represents the actual rate of interest someone pays over the course of a year due to compounding, the process whereby interest is added to unpaid principal. However, in a typical case, payday loan customers do not borrow for a full year, and the interest charges do not compound. Thus, there usually is no APR on a payday loan.

The bureau’s regulatory framework is based on the false claim that short-term lenders systematically prey on customers who cannot repay their debts. The evidence does not support such a claim."