EXCERPT FROM Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward: The CFPB In-Action Did The Consumer Bureau Get What It Needed? Did It Do What Was Necessary?
Written by Gregory D. Squires and Larry Kirsch
The Consumer Financial Protection Bureau has had a productive, if controversial, first few years. It has generated almost $12 billion in restitution for almost 27 million victimized borrowers. When we asked Elizabeth Warren “What are some of the most important things you’ve learned from its experience so far?” she replied that “the CFPB is working, and it’s incredibly popular with the families it helps. For me, the watchword is vigilance. Together, we must make sure the agency can do its job.” In examining the first five years of the CFPB in action we recently interviewed more than 50 people who are current or former CFPB staff members, financial service providers, consumer advocates, journalists, and others for our forthcoming book Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward to be published by Praeger. What follows is an excerpt from the concluding chapter.
Michael Barr, the Obama Administration’s point person on Dodd Frank, recapped his assessment of what the Consumer Financial Protection Bureau had gotten from the Act. According to Barr, the CFPB got what it needed from Dodd Frank and worked well with it. The provisional conclusion we come away with is that the Bureau got much—but not all it needed—and did quite well with it so long as it worked within the lanes dictated by its legal authority and the political realities associated with each market segment
Over time, a vital lesson to be taken from the Bureau’s experience was that recovery from the financial crisis demanded far more than a thorough spring clean-out of dysfunctional practices. It demanded a veritable root and branch transformation of the lender’s financial incentives and method of doing business with its customers.
One potentially important transformation written into the Dodd Frank Act was the creation of a mortgage originator’s duty of care to borrowers. Although stopping short of a creating a fiduciary obligation, it represented a step up from the longstanding caveat emptor relationship that had grossly disadvantaged borrowers. In conjunction with the CFPB’s rule on loan originator compensation, the duty of care addressed standards for the originator’s selection and presentation of loan options to borrowers. The new duty was backed by a private right of action that made it possible for borrowers to sue originators for unfair, deceptive, and abusive practices, including non-performance of the duty of care.
A second important lesson that could be drawn from the CFPB’s first five years has to do with the context of reform. In the case of mortgage origination, the strong impact of public perception, reputational risk, and slumping levels of trust left
mortgage lenders with little alternative but to acknowledge their share of responsibility for the financial crisis and to accept the role of the Consumer Bureau.
The precise opposite situation prevailed in the auto lending case. There, the fact that auto lending was never identified as a central part of the 2008 meltdown led to questions about the CFPB’s rationale for targeting it. The same fact situation was used as justification for the unique carve-out that Congress awarded to dealers during the Dodd Frank proceedings. Unlike the mortgage origination case, auto dealers and lenders did not feel pressured to cooperate with the CFPB by virtue of public opinion, reputational risk, or the threat of consumer distrust.
While ongoing relations between the auto industry or the mortgage lenders and the Bureau would hardly qualify as inspiration for a Hollywood love story, they have been more amicable and businesslike than many others such as industry opponents in the payday lending business and quintessential political adversaries including Congressman Jeb Hensarling, Senator Ted Cruz, and Congressman Spencer Bachhus In the case of mortgage lending, the fact that almost 20% of the 860,000 consumer complaints filed with the Bureau come from that sector reflects—but also guarantees—that mortgages will continue to be a focus of the CFPB’s ongoing initiatives. As a result, mortgage lenders have a continuing inducement to work, cooperatively, with the CFPB.
In contrast, consumer complaints about auto loans represent less than 1% of the total. There would appear to be little incentive, therefore, for those in the auto lending sector to adopt a particularly strident position in relation to the Bureau. So far, the dealers are politically secure so they can continue to hold out for the preservation of their historical levels of compensation and protection of their statutory carve-out.
This takes us back, once again, to Michael Barr’s engaging proposition that the CFPB got what it needed and did well with it.
What strikes us as being most provocative about Michael Barr’s vision of the Consumer Bureau is just how dynamic the market and political environment and their interactions with the Bureau seems to be. We can easily imagine how the tensions brought about by wholly new consumer challenges, shifting political personalities and conditions, new financial services products and technologies, evolving laws, and other critical factors would change the balance. Almost certainly this will continue to be contested terrain. No doubt the 2016 elections will intensify current debates. But through these various transitions there will always be a question of whether the Bureau got what it needed and how well it worked with it. Almost inevitably, what it requires in order to do the job and how well it does it will be in flux and cannot be predicted
with great certainty. By almost any measure, however, the CFPB has taken an impressive first step toward what Elizabeth Warren has referred to as one of its key roles: creating the rules and accountabilities necessary to assure that financial markets serve consumers well and fairly.
Gregory D. Squires is a Professor of Sociology and Public Policy & Public Administration at George Washington University and Larry Kirsch is the managing partner of IMR Health Economics, Portland, OR.. They co-authored the forthcoming book Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward to be published by Praeger this March.
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