May 24, 2011
– Written testimony from David S. Evans (Founder, Market Platform Dynamics)
Chairman McHenry, Ranking Member Quigley, and Members of the Subcommittee, thank you for asking me to testify on the CFPB. My name is David S. Evans. I’m the Chairman of Global Economics Group. I also hold teaching positions at the University of Chicago and the University College London. I’ve written widely on the financial services industry over the last 20 years. I’m the co-author of Paying with Plastic: the Digital Revolution in Buying and Borrowing, which has become the standard reference work on the credit card industry. I also consult on a wide range of issues for large financial services firms.
Shortly after the U.S. Department of the Treasury proposed the CFPA Act, Professor Josh Wright from George Mason and I started studying the legislation and the rationales being put forward for it. Early last year we published an extensive study on the proposed agency.
Based on our research, I am concerned that the CFPB could make it harder and more expensive for consumers to borrow money. And for small businesses who often rely on credit cards and other consumer lending products.
Just because someone puts the words “consumer protection” in the title of an administrative agency doesn’t mean that’s what it will do. There are two reasons to believe that that the CFPB could become an anti-lending and borrowing bureau that could harm consumers and small businesses and reduce economic growth.
The first is that there is an anti-borrowing bias built into the CFPB.
Professors Warren co-authored a long article in the University of Pennsylvania Law Review in late 2008 that laid out the rationale for the new agency and its agenda in detail. She claimed that consumers aren’t rational when it comes to borrowing money, that consumers make a lot of mistakes, and that consumers end up borrowing too much.
Professors Barr, Mullainathan, and Shafir wrote an article that proposed very intrusive government regulation into financial services. That included requiring lenders to offer plain vanilla products as a default. While at Treasury, Professor Barr was involved in drafting the CFPA and Professor Mullainathan was just appointed to be Assistant Director for Research at the CFPB.
Professor Wright and I have reviewed the intellectual foundation of the CFPB based on the writings of the people behind its creation. The view that people don’t really know what they are doing when they borrow money and that we need to protect consumers from themselves has become part of the genetic code of the CFPB. Unfortunately, at least in the writings that have provided the foundation for this new agency, there’s little recognition of the fact that consumer lending has improved the lives of millions of people and spurred job growth.
The CFPB has the tools to put the highly interventionist agenda described in these foundational papers into effect. And that’s the second reason I’m concerned. The new agency can ban “abusive” lending products. What those are is pretty much left up to the discretion of the head of the CFPB. The new agency can also steer financial services companies towards offering “plain vanilla products” designed by the CFPB by either banning products that don’t conform to the CFPB’s view or by making it legally risky and expensive for lenders to deviate too far from the products that the CFPB wants. Through prohibitions, disclosure requirements, and fines, the CFPB has the means to place a heavy thumb on consumer lending products that consumers, and small businesses, would willingly consume and that financial services companies would willingly offer.
There is no dispute that some lenders act very badly and that we need consumer protection. The proponents of the CFPB have made some real contributions to our understanding of some of the problems and possible solutions. I have a lot of respect for their passion and intellect. But regulation needs to be based on a balanced view of the benefits as well as the costs of lending and borrowing. In fact, most consumers and small businesses are responsible and don’t get into trouble. Over the last several decades the fraction of consumer loan debt that banks have to write off has varied from about 1.5 – 3.0 percent. Charge offs for consumer loans rose during the recent deep recession but are now coming back down to that low level. Most lenders provide products that people want and benefit from.
There are serious risks to the economy of restricting consumer credit. Let me focus on just one of them. Between 1992 and 2005 brand new small businesses generated an average of 3 million jobs a year. Access to consumer credit can make or break these entrepreneurs. Many of them use personal credit cards for financing. In fact the founders of some of our greatest companies—Google for example—had to max out their credit cards to stay afloat in their early days. Over time a heavy regulatory thumb on credit availability could therefore pose a significant drag on employment and economic growth.
In closing, I would counsel the Subcommittee to ensure that the CFPB has a leadership that is balanced and recognizes the great value that lending products provide for consumers and small businesses as well as the occasional problems. would also suggest that Congress keep watch over the Consumer Financial Protection Bureau to ensure that it does not become the Anti-Lending and Borrowing Bureau and harm the very consumers it was put in power to protect.
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