Someone’s Knockin’ at the Door-It’s the CFPB!

Yep, as the song goes, the industry’s new regulator may just be knockin’ at your door and ringin’ your bell, seven days from now, if you are one of the 111 depository institutions with more than $10 billion of assets. That agency, the Consumer Financial Protection Bureau (CFPB), just announced that it will begin supervising large banks starting July 21, the official kickoff date for the still director-less bureau that’s been charged with regulating just about any consumer financial product or service in the market now—or planning to be—in the foreseeable future. They say that they’ll conduct examinations during which “the CFPB will assess each institution’s internal ability to detect, prevent, and remedy violations that may harm consumers by reviewing the institution’s internal procedures and conducting interviews with personnel.” The CFPB’s mission is to ferret out and stop unfair, deceptive, and abusive practices. Their “[e]xaminers will look at the products and services the institution offers, with a focus on risk to consumers” including the “institution’s compliance with requirements during the entire life cycle of the product or service, including how a product is developed, marketed, sold and managed.”

Now, if you’re a large depository institution, don’t worry about having the welcome mat in place or freshly baked brownies at the door next Thursday. The CFPB will likely e-mail, call, snail mail or even—given how Internet savvy this new agency is—perhaps connect on LinkedIn (well, perhaps not) first. But before long—and probably after you’ve sent them a ton of stuff to look at—you’ll have some overnight guests to make comfortable.

Of course, banks are pretty used to having examiners as houseguests—many of whom routinely violate the “what do fish and houseguests have in common” rule of thumb. And they have had regulators with consumer protection powers for a long time. So what’s new about the CFPB?

For starters, the CFPB isn’t going to be business as usual. The theory behind creating the single agency—originally proposed in 2007 by Professor Elizabeth Warren in the article Unsafe at Any Rate—was that the prudential regulators weren’t taking their consumer protection responsibilities seriously, and as a result, consumers often faced many perilous financial products. In fact, she and other supporters of the law would argue these unsafe products literally blew up in consumers’ faces in the financial crisis and perhaps even caused it. We can therefore safely predict that whatever the previous regulators focused on that isn’t going to be what new examiners are going to be caring much too about.

Then, there’s the fact that the CFPB leadership has made it clear that they believe there are lots of serious problems that need to be fixed. So, the stakes are pretty high. These problems, they say, vary across financial products, but take credit cards as an example. The CFPB simply does not believe that competition is really working for the consumer, because people don’t really know what they are buying and how much they are really paying. Given this point of view, it would be very surprising if the examiners didn’t find a lot of problems after scouring the financial institutions. But what’s unknown is how aggressively the new bureau will take depository institutions to task when the examiners find things that they think look like worms under the rocks they are turning up. It could be anything from gentle nudges to getting the state AG’s all fired up for nasty litigation to anything in between.

And the CFPB will be using new and (to many) unfamiliar tools to do their work. The CFPB has an intellectual framework for identifying problems and fashioning solutions in the consumer financial services industry: behavioral economics. The proponents of the CFPB relied heavily on behavioral economics (a field populated by Ph.D.s in economics and psychology) and behavioral law and economics (a field populated by a combination of law professors and economists) in making their case for the need for an agency. Not surprisingly, the CFPB recently appointed Harvard professor Sendhil Mullainathan to head up their critical research division, which is working closely with the policy and enforcement folks.

That’s important because, for depository institutions, behavioral economics provides some predictability as to what examiners are going to be looking at and where they are most likely to find problems. Banks and credit unions should be using the lens of behavioral economics to inform just about everything they do—from auditing existing products to designing new ones—for the simple reason that behavioral economics is the lens that a very powerful regulator will be using.

So, rather than wishing for a sudden change in lyrics to don’t come knockin’ at my door, here’s another approach: think of the CFPB as the mother-in-law that you get when you get married. It will take some getting used to the intrusion—at all of the wrong times—and unsolicited opinions about your business. There will be things that drive you nuts. But, like her or not, she’s going to be part of your life for a long time to come. Since regulators hardly ever die—and divorce is no solution here—that could be for a very, very long time indeed.

—–

David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework®, a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass. David is the Founder of Market Platform Dynamics. Read More


Related Content

 

CFPB Outlines Bank Supervision Approach

No Need for Credit Unions to Fear CFPB, Says Exec

“100,000 Firms” Could Fall Under CFPB Jurisdiction: WSJ

House Appropriations Committee Votes to Limit CFPB Funding

CFPB Blog: Mortgage Disclosure Is Heating Up