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Senate Debates Effects of Consumer Finance Regulations

SenateTwo days in advance of Consumer Financial Protection Bureau (CFPB) Richard Cordray’s testimony before the Senate Banking Committee, the Committee held a hearing on Tuesday to debate whether the consumer finance regulations passed as a result of the crisis are helping consumers—or having the opposite effect.

Now almost five years old, the CFPB remains the subject of a heated debate among lawmakers: Is the Bureau an organization vital to the financial well-being of consumers, or is it simply a government bureaucracy that abuses its power?

In his opening statement at the hearing, Committee Chairman Richard Shelby (R-Alabama) lamented the fact that the CFPB is not subject to the same type of checks and balances system which governs other federal regulators—and consumers are the ones that have suffered because of it.

“Because of the Bureau’s structure and the means by which it is financed, it remains one of least accountable agencies in the federal government,” Shelby said. “As a result, the very consumers that the CFPB was designed to help have been harmed by the Bureau because some of its rules make it more difficult for companies to lend and offer products in the marketplace. The Bureau has enormous power over consumer financial matters.  It has, however, no statutory mandate to write balanced regulations that protect the economy or promote institutional safety and soundness. As it continues to exercise its considerable regulatory powers, it does so without any meaningful statutory check by Congress.”

Sherrod Brown (D-Ohio), Ranking Member on the Committee, defended the Bureau’s actions in his opening statement.

“The crisis revealed that Americans needed a federal watchdog that would put their interests first,” Brown said. “The CFPB has been a success. The agency has taken strong actions in a number of consumer finance markets that previously had no federal oversight, including credit reporting, debt collection, payday loans, student loan servicing, and auto finance. The benefits of the CFPB are clear: its actions have resulted in $11.2 billion being returned to over 25 million consumers.”

The Rev. Willie Gable of the Progressive Baptist Church of New Orleans, one of four witnesses at the hearing, noted that the CFPB has played a critical role in implementing mortgage rules that prevent predatory practices.

“The mortgage market is, of course, an absolutely vital one,” Gable said. “Homeownership is the primary vehicle through which families build wealth and pass it on to future generations. Homeownership brings tangible benefits to neighborhoods, schools, and cities, and carries immense intangible value as well. This is particularly important for families of color, who still lag so far behind economically. The predatory practices in the market had catastrophic consequences, and ones that became evident to all.”

“The tragedy of Dodd-Frank and the CFPB is that it squandered this unprecedented opportunity to modernize the consumer credit system to promote competition, consumer choice, and innovation.”

Todd Zywicki, George Mason University School of Law

Another witness at the hearing that addressed the impact of the CFPB on the mortgage industry was Leonard Chanin, Of Counsel with law firm Morrison & Foerster and a former Assistant Director of Regulations with the CFPB. Chanin warned that over-regulation can limit access to financial products.

Chanin told the Committee that “there can be benefits to regulation,” but at the same time, “there are many risks and dangers to regulating ‘too much’. . .it seems clear that such rules and other actions have had a significant adverse impact on the ability and willingness of institutions to offer those products and services. Anecdotal and other evidence clearly indicates that institutions have reduced the products and services offered to consumers and some institutions have been reluctant to offer new products and services. Recent CFPB rules on mortgages illustrate this result.”

Chanin continued, “Some institutions that previously offered mortgages have stopped doing so because the costs of complying with the new rules cannot be spread over a sufficient number of loans to enable them to effectively compete in the marketplace. In addition, a number of institutions have reduced the products offered to consumers. In fact, a recent American Bankers Association survey revealed that, due to the CFPB mortgage rules, 75 percent of banks surveyed eliminated one or more mortgage product offerings, such as construction loans and loans with payout options.”

Another witness, Todd Zywicki, Foundation Professor of Law and Executive Director of the Law and Economics Center, George Mason University School of Law, concurred with Chanin’s assessment that more regulation has meant fewer opportunities for consumers.

“The tragedy of Dodd-Frank and the CFPB is that it squandered this unprecedented opportunity to modernize the consumer credit system to promote competition, consumer choice, and innovation,” Zywicki said. “Instead, the post-crisis regulatory framework has resulted in higher prices and reduced choice for consumers and little improvement in consumer financial protection. Indeed, by stifling competition and driving millions of Americans out of the mainstream financial system, it may actually result in more consumer protection problems.”

Zywicki continued, “Given this extreme lack of democratic accountability, the CFPB has done what all bureaucracies tend to do: it has constantly expanded its power, promoted its own bureaucratic interests at the expense of the public and American families, and trampled underfoot other public policies, such as consumer choice and financial innovation.”

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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