What would happen if your city suddenly fired half its cops—or, worse, made it clear that in certain neighborhoods, there wouldn’t be any cops at all? You’d probably be scared, and crime would soar.
That’s the situation we may face when it comes to loans, credit and other financial products if certain lawmakers succeed in gutting the Consumer Financial Protection Bureau (CFPB).
Back up… What’s the CFPB?
Remember the Great Recession? You may recall it came about in part because of the subprime mortgage crisis. Banks and lenders were offering complex loans to borrowers who didn’t really understand or qualify for them (by conventional standards). Many mortgages carried low initial interest rates that reset after a few years. In the meantime, housing prices were declining steeply.
When the adjustable mortgages reset at higher rates, many borrowers struggled to keep up yet they couldn’t sell their homes to cover the difference as they’d dropped in value. Borrowers defaulted, foreclosures spiked—and millions of families lost their homes. Lehman Brothers (the fourth largest U.S. investment bank at the time, with 25,000 employees), which had bet big on subprime mortgages, declared bankruptcy. And the economy tanked.
What does that have to do with the CFPB?
The CFPB was formed in the wake of all that (authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which also added protections against banks taking risks with our money) after evidence showed many financial products, including not just subprime mortgages but private student loans, payday loans and car title loans—and the firms that sold them—were slipping through the regulatory cracks.
That’s partly because the Office of the Comptroller of the Currency (OCC) and other bank regulators have an inherent design problem: They’re supposed to ensure banks are healthy—meaning they make plenty of money—which can sometimes conflict with the goal of looking out for the best interests of consumers.
The CFPB was created to solve that. It meant consumers finally had a D.C. agency on their side. One number to call, or website to visit, when they felt cheated by a bank or other financial services company. And call they did: From 2011 to January 2017, the bureau fielded 1,080,700 complaints and ordered the return of $11.7 billion to consumers who were determined to be victims of deceptive and unfair financial business practices.
What’s not to like about that?
For starters, some lawmakers have taken issue with the CFPB’s “single director” structure, arguing that bureau head Richard Cordray has way too much power. (It was set up so that he could only be fired by the president for cause.) In October 2016, a judge ruled that setup unconstitutional, though in February a U.S. appeals court in Washington granted the agency’s request to reconsider that decision.
It’s also been estimated that Dodd-Frank has cost businesses more than $24 billion in compliance-related expenses and millions of paperwork hours. Banks argue that when regulations impair profitability, that hurts consumers, too.
Is there truth to that?
Banks have argued the money spent on compliance-related expenses could be used instead to lend to consumers and small businesses. But in a Senate hearing earlier this month, Federal Reserve Chairwoman Janet Yellen cited a National Federation of Independent Businesses survey showing just 4 percent of small businesses were unable to get the loans they want currently. The Federal Reserve also reported recently that bank commercial and industry lending is at an all-time high. So it’s not clear how much of a difference the repeal of regulatory requirements would increase business lending.
On the consumer front, it’s worth recalling this: In another financial reform, through the CARD Art, a series of unfair and unpopular credit card fees, like universal default (meaning if you’re late with one debt payment, any of your creditors can up your interest rate), were banned. Banks said this would hurt consumers by making credit cards harder to obtain, but that has turned out not to be the case.
One study found the CARD Act was actually saving consumers $12.6 billion annually, and meanwhile, their borrowing costs decreased: In other words, getting credit cards was easier, not harder—especially for those with lower credit scores.
So what’s going to happen with the CFPB?
Currently, removal of Cordray is tied up in a complex court battle, so he and the bureau appear to be safe until at least May. But the longer-term future of consumer protection is hazy, which may be a problem in itself.
No agency can catch all the bad guys, but it can make clear that a good number of them will pay a price. That scares other companies straight. On the other hand, when criminals know cops never visit a certain neighborhood, crime explodes. Even if the CFPB survives, if word on the street is that the Feds are backing off, you can expect firms to push the envelope back toward their good old days.
March 2, 2017