House Financial Services Committee Chairman Jeb Hensarling, R-Texas, is a proponent of the free market. He and other free-market advocates believe that consumers discipline wayward companies — better than does the government — by eschewing their offerings.

This view has an empirical basis. Not so long ago, many consumers carried BlackBerrys. Now, few do — because consumers prefer other smartphones. Markets can indeed be powerful.

But consumer willingness to switch to more attractive products is different from saying consumers will punish malefactors, and here the free-market approach leaves much to be desired.

Wells Fargo branch.
Wells Fargo’s opening of millions of phony accounts was perhaps the most significant bank scandal to come to light since the financial crisis. But the Financial Choice Act, if it had been enacted, would have weakened federal regulators’ ability to punish the bank. Bloomberg News

Wells Fargo’s opening of millions of phony accounts using the names of its customers was perhaps the most significant bank scandal to come to light since the financial crisis. But Hensarling’s Financial Choice Act, which passed the House Financial Services Committee, would have weakened federal regulators’ ability to publicize the scandal and punish Wells. The Consumer Financial Protection Bureau, which joined the Office of the Comptroller of the Currency and Los Angeles city attorney in forcing the bank to refund customer fees and pay $185 million in fines, would have the power it used against Wells stripped by the House bill.

Hensarling’s bill would rename the CFPB as the Consumer Law Enforcement Agency, remove much of its independence and eliminate its authority both to supervise large banks and penalize institutions for “unfair, deceptive, and abusive acts and practices,” among other restrictions. Its rulemakings would be subject to congressional approval.

If the bill had been enacted — and the consumer bureau were just a shell of the agency it is today — it is a fair question to ask whether Wells Fargo would have been held accountable for its actions.

In the case of Wells, a weakened CFPB would have left the OCC and the Los Angeles City Attorney to protect consumers. But according to a recent OCC report, the national bank regulator knew of the Wells problems as early as 2010 and didn’t follow up. That is consistent with the OCC’s history of protecting banks from consumers more than consumers from banks — such as it did in the years before the subprime crisis when it said that state laws barring predatory lending did not apply to national banks.

As for the Los Angeles city attorney, it is a lot to ask that it protect the entire country, especially given the limited powers of a city agency.

Injured Wells consumers could still have sued. But Wells Fargo’s contracts included an arbitration clause that prevented consumers from bringing class actions. Those agreements have been upheld in court, even though the consumers agreeing to them probably had no idea that they would apply to fraudulent accounts opened with forged signatures. Consumers could file for arbitration individually, but studies have found that consumers almost never bother to file arbitration claims for less than $1,000. Many Wells customers probably suffered damages of less than $1,000. The CFPB has proposed a regulation that would bar banks from preventing consumers from joining class actions, but congressional Republicans also want to take away from the CFPB the power to issue that regulation.

Why are congressional Republicans so opposed to consumer protection?

If it is free market ideology — a belief that consumer choice is a sufficient check on bad company behavior — then the aftermath of the Wells scandal suggests that government regulation is a more effective check. As the Wells story gradually became public, the number of its active checking accounts still kept going up over the same quarter in the previous year. The Los Angeles Times broke the story about the fraudulent accounts in 2013, and the next quarter the number of primary checking accounts jumped by more than 5%. Accounts went up by even more after lawsuits were filed in the spring of 2015. Even after the regulators fined Wells Fargo in 2016, active checking accounts still increased by 3.5%.

While some other measures of consumer patronage of Wells are not so positive, the marketplace seems less interested in disciplining Wells than those public servants charged with protecting consumers. That is understandable given the difficulty consumers face in moving bank accounts. Fortunately, Wells has agreed to waive its arbitration clause and settle the class actions. (A court still has to approve the settlement and is facing objections.) But consumer victims in lower-profile cases may not be able to enjoy such a waiver. The Wells case — as the subject of nationwide media attention, regulatory action, congressional hearings and proposed legislation — has a much higher profile than most consumer disputes.

If Republicans succeed in limiting the CFPB’s powers, it is hard to imagine what would restrain financial institutions from taking advantage of consumers in less visible matters. Regulators may not be able to restrain them, people wouldn’t sue and the market wouldn’t be able to impose enough discipline.

Our president ran for office promising to protect ordinary Americans. Yet his congressional partners seem more interested in protecting banks.

Jeff Sovern

Jeff Sovern

Jeff Sovern is a professor of law at St. John's University and co-coordinator of the Consumer Law and Policy Blog sponsored by Public Citizen.

BankThink submission guidelines

Want to contribute to BankThink, American Banker's platform for informed opinion about the ideas, trends and events reshaping financial services? View our detailed submission criteria and instructions.