Does The CFPB Really Help Consumers?

Malaria was killing the good people of Borneo in the 1950s in droves. The situation was serious enough to enlist the help of the World Health Organization. The WHO came in with massive amounts of DDT spray and obliterated the malaria-carrying mosquitoes.

Malaria cases ground to a screeching halt. Mission accomplished!

But, soon thereafter, something else mysterious began to happen. The thatched roofs of the huts in which the villagers lived began collapsing. It was discovered that the DDT spray that annihilated the mosquitoes also killed the wasps that ate the caterpillars that burrowed into — and were now eating — the roofs of the thatched huts in which the villagers lived.

If that wasn’t bad enough, villagers continued to get sick and die — but not from malaria. The diagnosis was typhus and the plague carried by rats that seemed to be multiplying in force. The cats that once ate the rats were dying, too, since the DDT had infected their food source. Without the cats to eat the rats — who can apparently eat just about anything and live — villagers found themselves facing a whole new health crisis.

The DDT brought in to solve one very serious problem for the citizens of Borneo had unleashed a wave of unintended consequences just as harmful.

Now, you’ll be happy to know that all of these problems were ultimately solved by the WHO when they did the logical thing and parachuted a bunch of live cats into Borneo to eat the rats, which ultimately restored the balance of power in the ecosystem.

No joke.

If only parachuting a bunch of live cats into Washington, D.C., was the solution to saving the payments and financial services ecosystem from the unintended consequences of the actions of the CFPB.

The CFPB is an agency that, today, employs nearly 1,000 people and, in the five years it’s been in existence, has levied $10.1 billion in fines and other sanctions across a number of financial services “lawbreakers.”

Those “lawbreakers” include the “Who’s Who” of the financial services and payments industries, including Bank of America, JPMorgan Chase, Discover, American Express, Western Union, PayPal, Sprint, GE Capital, Regions Bank and Honda — to name a few. They’ve all been whacked by the CFPB for doing something that it thought was harmful to consumers.

Actions that have, in turn, created a number of unintended consequences for those consumers — from higher checking account and ATM fees to lack of access to credit to throttling the innovation engines of many financial services companies.

And, judging by the many proposals that are in front of the CFPB now — from deciding how prepaid cards and payday lenders will function to whether arbitration will be a quaint relic of the past when resolving disputes with credit card companies to whether companies can be paid a referral fee for legitimate lead generation — things for both consumers and financial services companies could soon get much worse before they get better — if they ever do.

The CFPB was the brainchild of now Senator Elizabeth Warren (D-MA) in 2007. In those days, she was “just” a Harvard Law School professor with an expertise in bankruptcy law. Her idea was to create a separate and independent federal agency to make sure that “ordinary people were dealt with fairly.” At that time, she pointed out that we have regulations to make sure people don’t get hurt by exploding toasters, so why shouldn’t we make sure they don’t get hurt by financial services products that could be just as harmful?

And just when everyone questioned whether it was even possible for banks to create products as bad as exploding toasters, 2008 happened. The 2008 financial crisis turned out to be the convenient spark Warren needed to make her idea a Congressional reality.

The CFPB got rolled into the Dodd-Frank Wall Street Reform Act — and even got named billing: Dodd-Frank Wall Street Reform and Consumer Protection Act. It was the subject of acrimonious debate, and thankfully, some of its more farfetched powers were rolled back. But Dodd-Frank passed with CFPB as its centerpiece. The new agency officially opened for business in 2011.

The CFPB has supervisory powers over financial institutions with more than $10 billion in assets, and for the first time, a federal agency has been given jurisdiction over a slew of non-bank financial companies, including mortgage companies, payday lenders, private student loan lenders and servicers, debt collectors, consumer reporting agencies, auto lenders and money transmitters. Its primary goal, as stated on its website, is to “prevent financial harm to consumers while promoting good practices that benefit them.”

So, what could be so wrong with an entity that’s only looking out for the consumer?

As we now understand, plenty. Mostly in the form of the unintended consequences for both the consumer and the financial institution that are the result of how the CFPB is funded, how it’s run and how it targets “lawbreakers.”

Want to know why ATM fees are higher than they’ve ever been, or why so many people can’t afford checking accounts? The combination of CFPB and Dodd-Frank regulations in areas related to overdraft fees and debit-card interchange have forced banks to raise prices in order to offset the fee income they have lost. Since no one has yet figured out how to provide consumer banking services for free, banks have to find revenue from somewhere.

Want to know why it takes longer for a bank to decide whether (or if) to lend a consumer money or why so many banks have gotten out of the student loan business? Answer: Any slip-up and the CFPB will come crashing down on the bank with crushing penalties and other sanctions.

Or why banks are reluctant to innovate at all? In addition to now having to spend billions and hire the thousands needed to staff compliance operations in response to CFPB’s enforcement actions, they’d just rather not. The environment in which they operate now is just too risky and expensive in the shadow of the CFPB — an agency that is organized and funded in such a way that makes it accountable to absolutely no one.

The CFPB operates as a totally separate and independent agency outside of the purview of Congress. Its funding source isn’t Congress but the Federal Reserve. By statute, the CFPB receives a fixed percentage of the Federal Reserve Board’s operating budget, and it cannot be denied requests for funds up to that cap. Since 2012, the CFPB’s annual operating budget has been 12 percent of the Federal Reserve’s operating budget, which in 2014 was $584 million. That made the CFPB’s budget ~$70 million last year.

The CFPB is run by a director who can decide pretty much unilaterally how that money will be spent, how supervisory review and enforcement happens and who’s on the receiving end of their investigations. The CFPB’s first and current director, Richard Cordray, was given that job during a recess appointment in 2012 and will serve in that capacity until 2017. Under the act, the director, who is appointed by the president, has a five-year term. That’s a lot of power — and funding — rolled into one person.

Letters from the CFPB are never welcome news — almost 100 percent of the time they result in an action and often a pretty big fine. Companies can push back, but it’s not exactly a fair fight.

An enforcement action can be appealed to an administrative law judge who was appointed by — guess who — the CFPB director! If the company loses that appeal, the appeals process is to take the case back to the CFPB director who whacked them in the first place! Should anyone be crazy enough to do that, there’s always federal court, where the real winners, of course, are the lawyers who’ve been racking up fees. But at least there’s hope there.

Sort of.

When companies have challenged the CFPB, it’s usually not ended well for them. In one situation where the first appeal was sent back to Cordray to review, he found more violations that increased the final penalty by 17 times (from an initial fine of $6.4 million to $109 million). It’s not surprising that most companies just pay the initial fine to make things go away.

Who the CFPB decides to go after is a little like how Peeple — the “people’s version of Yelp” — would have worked: by looking at the complaints that it solicits.

As of Aug. 1, 2015, the CFPB had amassed ~677,200 complaints, mostly about credit reporting errors, debt collection tactics and mortgage loans. Certainly, there are legitimate complaints in this database, but there isn’t a formal or transparent process where these complaints are verified, proven or substantiated before an action is initiated. The database is now public, so it’s possible for everyone to see how consumers describe their complaints — which contain liberal uses of words like “unethical” and/or assertions that actions taken by a company violate laws, despite any factual basis for whether they do or don’t. The CFPB also decided recently to launch its own version of the modern-day public stockade — a list of the companies that consumers (with unverified complaints) have complained the most about.

Naturally, and for good reasons, financial services companies are more than a little concerned.

LET’S PLAY WHACK A BANK!

Having a virtual dictator protecting consumers might be just fine (although it seems more like something they’d do in China or Russia) if that dictator looked at the bigger picture, understood the law of unintended consequences and generally did things that helped consumers and sanctioned the truly bad actors.

The problem is that the CFPB never seems to think beyond its immediate objective of slaying anyone who makes money from selling financial products to consumers.

Anyone.

Do you charge services for financial services or payments products? Let’s see, if the answer is yes — which it is for about 100 percent of financial services and payments companies — that automatically puts you on its suspect list.

And if you are involved in products that are targeted to the underserved or small business? Well, you get it with both barrels.

For instance.

They whack prepaid cards.

But many poorer people depend on these cards to manage their money — or would like to. In an ideal world, they wouldn’t have to pay much for this, and everything would be grand. In the world we actually live in, the more the CFPB bears down on prepaid issuers, the more providers pull back and the more the financially underserved or unbanked are pushed further into desperate straits.

And, they are about to make a decision that would eliminate the convenience that some prepaid issuers offer their customers by giving regular customers overdraft protection for one or two days in amounts that are a whopping $60 or $75. Instead of treating these charges as what they are — the equivalent of overdraft protection since prepaid cards function as the equivalent of checking account products — the bureau is threatening to regulate them as lending products and require that a consumer prove creditworthiness before a $60 advance for 24 hours can be extended. We all know what the unintended consequences of that will be.

Time to parachute in the cats!

They whack payday lenders.

Sure, some of them are scuzzbags. And wouldn’t it be great if financially strapped Americans didn’t have to resort to borrowing against their paychecks. But that’s an economic and social problem that isn’t going to get solved by making it harder for people to borrow money when they really need it. Push the payday lenders out, and the need for money doesn’t go away. It just pushes the financially strapped to pawnbrokers, loan sharks and, I suspect, at the margin, into crime.

This is especially curious when we know, with absolute certainty, that there are software solutions that have been implemented at the state level in 16 states that keep the good payday lenders in compliance and the consumers they serve protected. There are solutions that can be deployed that can give consumers what they need and the financial services providers what they need, too, to serve their consumers well. But they seem to be ignored even though it is an example of innovation where the consumer can really be helped.

Time to parachute in the cats!

They whack credit card issuers.

Sure, there have definitely been overly aggressive issuers with slick marketing methods that trick consumers into borrowing money at high rates. I get that. But the CFPB isn’t engaging in targeted sniper attacks on bad practices. Instead, it’s carpet bombing the credit card industry — at large — with rules and fines. So, what’s happened? It’s only made it hard for small businesses to borrow on their credit cards and run their businesses, and it is making it harder for Americans who really need to borrow money to get by.

And its newest proposal to ban arbitration in matters that relate to credit card disputes in favor of class action lawsuits will only make things worse. If passed, get ready for tighter restrictions on who gets credit and for a whole new class of ambulance-chasing attorneys to emerge.

Time to parachute in the cats!

They whack money transmitters.

Companies that enable money transmission from the U.S. to other countries are now part of the CFPB’s purview. That has done one thing: convinced banks that used to provide such services to get out of that business. Thanks but no thanks, they said, and who can blame them. That then contracted the market for money transmission services in the U.S. — so, fewer choices for consumers. And, if you are unfortunate enough to be a provider of that service, the CFPB is now in the middle of your business, making sure that consumers don’t pay “too much” for those services, despite having no earthly understanding of how expensive it is to build the cash in and cash out networks here in the U.S. and abroad that enable the efficient delivery of those funds — yes, cash is alive and well and used in these transactions a lot — not to mention what it costs to do it securely and in compliance with all of the AML and KYC regulations.

Time to parachute in the cats!

And the list could go on.

I wish I could say that all the victims of the CFPB’s actions had clean hands. But, unfortunately, the banks, and others, have done enough bad stuff over the years that they made it way too easy for Sen. Warren to gain the momentum needed to make CFPB the reality that it is. I hate to blame the victim here, but there’s some truth to what I say.

But, we’re now going on five years into this experiment, and we have some perspective. And, we need to take some serious stock here on the unintended consequences of an agency that was set up to benefit the consumer. That means making sure that in the quest for blood from the banks, the CFPB, and other regulators, don’t end up harming consumers, small businesses and, in particular, the financially underserved portion of society in the process — which it looks like they are doing and doing a fine job of.

Restoring the balance, moving the pendulum back to where it needs to be, in my opinion, is going to require some serious rejiggering of the CFPB.

If I had a magic wand for a day, I’d get rid of the dictator and Kafkaesque practices. I’d put the CFPB under Congressional oversight. And, make sure that it is forced to seriously evaluate the unintended consequences of all of its actions — all of them. I’d make sure that the bad actors got whacked, for sure. But just like using DDT to eradicate malaria ended up causing the good people of Borneo to suffer more, I’d want to avoid killing the financial services sector — and, in particular, the banks — just because it makes for good PR. We can’t let unfettered authority wrapped up in one agency also kill our best hopes for all consumers to get the products and services they need by making it impossible for financial services providers to innovate.

Then again, maybe we could just parachute in a lot of cats and hope for the best.