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Consumers Need Protection from the CFPB

A new paternalism is on the rise.

Using the insights of behavioral economics, agencies like the Environmental Protection Agency and the Consumer Financial Protection Bureau have been regulating the economy in ways never witnessed before. These agencies seek to identify perceived shortcomings on the part of the consumer rather than address shortcomings in the marketplace. In other words, consumers are now being regulated because they are considered to be less attentive to detail — and therefore more likely to make harmful choices — than government officials.

This reorientation of regulatory strategies was spurred by the realization that people, by nature, are not always rational in their choices. According to some experts, consumers tend to save less than they should. They tend to overestimate their future ability to pay the bills and underestimate the debt obligations they place on themselves when taking advantage of credit opportunities. At least, this is the reckoning of the group of academics and policymakers responsible for regulating consumer credit in this country.

One of the latest targets of such regulators is payday lending. Payday lenders usually offer a two-week loan, with the interest plus fees of that loan amounting to around $15 for every $100 borrowed. The loans are typically paid back in full around the time of the borrower's next payday.

Nonetheless, the CFPB has released a 1,300-page statement excoriating this industry for what is seen as predatory lending that takes advantage of the average borrower's low cognitive ability. The policy response is yet to be defined but it will likely include measures like limiting the number of rollovers.

In reality, the profile of a typical payday loan customer is someone who has low income and lacks access to more mainstream credit products like credit cards and home equity lines. Their cognitive abilities seem fairly consistent with other credit users; only their economic circumstances differ.

In effect, the alternatives available to payday lending customers do not include the type of credit products regulators enjoy. Rather, they include a series of less desirable credit products, such as overdraft fees, credit card cash advances, pawnshops or selling off their possessions. Removing one or more of these sources of credit doesn't fix the problem; it only forces customers into a less preferred alternative.

For a self-described "21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives," the CFPB has made a series of moves that do less to empower consumers and do more to take away what limited credit options they have.

The CFPB is a virtually independent $600-million agency, and its budget is not subject to oversight from Congress. It's no wonder the agency has reacted to its mandate provided by the Dodd-Frank Act by issuing rulings — and thinly veiled threats — to a wide swath of the marketplace, including parts it was told not to interfere with, such as auto lending.

Government agencies running amok are hardly novel. What's new about this particular agency is how it tinkers with regulating the marketplace. The agency essentially chooses products — or even entire categories of products — that a consumer may have trouble understanding. It then targets the firms that offer these products by putting regulatory and other market pressures on them to obstruct, reduce or terminate their respective businesses.

Recently, a federal appeals court ruled that its structure is unconstitutional; however, that is just a start to ensuring that consumers are protected from a consumer protection agency.

It is one thing to have an agency championing consumer protection against fraud, but it's quite another to have one looking out for consumers' perceived lack of willpower or intelligence. It is akin to accepting that agency officials are capable of making better decisions for us than we are for ourselves.

As former EPA administrator Brian Mannix wrote in 2010:

The chief danger is that regulatory agencies will take the irrationality of consumers as sufficient reason, by itself, to intervene in markets, and will give primacy to the government's own judgment of what is good for us.

This explains why the CFPB wants to drive out certain options altogether rather than approach problems in a nuanced and data-driven manner. It's much easier to vilify market services with labels like "predatory lending" and "shrouded fees" in an effort to intimidate them out of existence than it is to appreciate the exact manner in which these credit forms are utilized by actual consumers.

Protection is important: It's why governments exist. But for a government agency to operate effectively there must be institutional checks and balances.

Adam C. Smith is an associate professor of economics and director of the Center for Free Market Studies at Johnson & Wales University.

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Comments (11)
So pitchforks and rioting in the street should be the only check on abuse of power by the Bureau? By then it is far too late.
Posted by WayneAbernathy | Thursday, October 20 2016 at 12:33PM ET
Still struggling to identify any Financial Service Provider that has suffered material harm from the actions of the CFPB. Many have been hoisted on their own petard, or lost at the big roulette wheel of capitalism, but no agency has sunk any ship. Rescued a few, but there are no cadavers in the sacred halls. The FSPs do, however, offer the only real objection to the CFPB's actions. There is no Occupy CFPB movement, and that is telling. If those in the medical community started to call for the end of the HHS, the FDA and the AMA, and for the general wide-scale deregulation of medical practice, would you be concerned? Should the patients be held responsible for the cognitive load of evaluating which course of action will best meet their needs? Should the free market determine which procedures are safe, or ethical?

When Wall Street fills with people protesting the actions of the agency, it may be time to consider revoking their charter. If the moneylenders are the only people objecting to the CFPB, that suggests they may be hitting the right targets.
Posted by teknoscribe | Wednesday, October 19 2016 at 9:53PM ET
Regulation is a poor substitute for ethics but I glad to hear that Rob has this under control.
Posted by Common Sense | Wednesday, October 19 2016 at 5:27PM ET
You mean, why it left consumers with "choice," according to the thrust of this piece? It might be because investigations that lead to $100 million fines typically don't happen overnight. Or the premise of your question could be wrong, as the fraudulent practices themselves may have been stopped before the CFPB's announcement in Sept. 2016.

Got anything else?
Posted by Rob Randhava | Wednesday, October 19 2016 at 11:51AM ET
Best left to the Bureau to explain why it left consumers exposed for 3 years.
Posted by WayneAbernathy | Wednesday, October 19 2016 at 11:35AM ET
Wayne, I know CFPB's opponents have to come up with something... but the most elite of all told the Senate that his Bureau first got complaints about the Wells thing in mid-2013. Was he lying under oath, or did he just sit on it and do nothing for three years before suddenly deciding it was worth $100 million in fines? Do explain, please.
Posted by Rob Randhava | Wednesday, October 19 2016 at 11:29AM ET
Except that these Washington elites apparently missed the whole Wells Fargo matter for years, showing up in time only to collect fines.
Posted by WayneAbernathy | Wednesday, October 19 2016 at 11:01AM ET
Yes, how dare these Washington elites tell consumers they can't choose which Wells Fargo accounts they'll be signed up for behind their backs or how much to pay on their option ARM loans every month...
Posted by Rob Randhava | Wednesday, October 19 2016 at 10:57AM ET
Spot on. Under the guise of consumer protection, the CFPB's actions are premised on the notion that individuals aren't intelligent enough to make financial decisions for themselves. The CFPB knows best and all financial institutions are inherently evil. Forget personal responsibility and free markets. Let's call the CFPB what it is: Big Brother of the consumer financial marketplace.
Posted by interestedparticipant | Wednesday, October 19 2016 at 10:36AM ET
Every significant rule promulgated by the Bureau has reduced the supply and availability of, and access by consumers to, financial services. Which is the point of the article: the Bureau is regulating CONSUMERS. Truth in labeling would suggest renaming the agency the Bureau of Consumer Financial Regulation.
Posted by WayneAbernathy | Wednesday, October 19 2016 at 9:58AM ET
How many firms has the CFPB managed to obstruct, reduce or terminate? Of all the headline actions and fines, none have put any major player out of business. Until last week, the CFPB had not even managed to pressure a single executive to "retire" against their will. While the structure is a bit questionable from an accountability perspective, the torches and pitchforks of the people have all been aimed on the other side of their fence (and for pretty good reason).

I'll go out on a limb here, and say the author probably has access to the same types of credit products the regulators enjoy. At least, I don't get the sense the author has felt the kind of pressure that pushes people into a payday lender's cold embrace. The issue is not cognitive ability - we who have been there know that we are entering into a bad deal (600% interest rates kind of jump off the page at you), but it is easy to think there is not much choice. In the end, however, the "less preferred alternative" is usually better, and we may need an agency to put the legalized sharks out to sea. The market does not always correct before the kneecaps are broken.
Posted by teknoscribe | Tuesday, October 18 2016 at 10:45PM ET
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