Watching out for consumers

MARY REICHARD, HOST: It’s Thursday the 13th of March.

This is WORLD Radio and we thank you for listening! Good morning, I’m Mary Reichard.

MYRNA BROWN, HOST: And I’m Myrna Brown.

First up, the Consumer Financial Protection Bureau—its past, its future, and the debate over whether it should even exist.

REICHARD: Last week, the Senate Banking Committee advanced President Donald Trump’s nominee to lead the agency: former FDIC board member, Jonathan McKernan. The committee vote was split along party lines—13 Republicans in favor, 11 Democrats opposed. The nomination now goes to the full Senate for a vote.

BROWN: The CFPB was formed in response to the 2008 financial crisis. It aimed to protect consumers from deceptive lending practices. But even its existence has been controversial.

The agency’s been in limbo since early February. That’s when the Trump administration ordered it to suspend all operations, cancelled $100 million dollars in contracts and fired 70 employees.

Some people are outraged; others see it as much needed reform.

REICHARD: The CFPB is the brainchild of Senator Elizabeth Warren and she is its fiercest defender. Here she is touting its successes at a rally last month to bolster support for it:

WARREN: The CFPB is the cop on the beat. And that cop is the one that caught the crooks and so far has made them give back $21 billion dollars.

Abuses the CFPB has uncovered include banks opening accounts for customers without telling them—Wells Fargo comes to mind—and payday lenders that make sure consumers never pay off the debt.

Adam Rust is with the Consumer Federation of America. He argues that the CFPB plays a critical role in financial oversight.

RUST: The CFPB has penalized those institutions. Payday lenders, there was one that was, again, incentivizes employees to make sure you rolled over your loan that you never really paid it off but kept adding another round of fees and another round of fees that traps people in debt and can actually just destroy their financial stability. So those are some examples.

BROWN: Some rules in limbo now are quite popular among consumers. For example, a rule that bans the inclusion of medical debt on credit reports. The CFPB says this would keep debt collectors from using erroneous medical bills to pressure people to pay up to improve credit scores.

Rust says that without CFPB enforcement, predatory financial practices will flourish. But financial analyst David Bahnsen sees the CFPB as poorly run and structured, and another unnecessary bureaucracy for taxpayers to fund.

BAHNSEN: Why would we have needed new alphabet soup regulatory, with all of the alphabet soup regulatory we already had? If Wells Fargo was opening accounts for people that didn't need them, which they were, and we don't want that to happen. What is the FDIC doing? What is the Federal Reserve doing? What is the treasury department doing? There are plenty of other regulatory bodies, including state regulatory which has primary oversight of this that would have, could have and should have done the exact same thing to identify Wells Fargo's bad behavior that the CFPB ended up doing. What the CFPB did was get the press release for it. Any number of other regulatory agencies would have, could have, and should have stopped Wells Fargo's bad behavior.

Rust counters that the CFPB fills a particular role in the scheme of government financial regulation:

RUST: Nothing is really out there aside from the CFPB that is focused exclusively on consumer financial protection. Those kinds of gaps at the federal level were identified prior to the financial crisis when there were a number of, especially non-banks, for some mortgage lenders that aren't banks that…employing risky practices and …pursuing short-term profits, but at the expense of the broader economy. And so people lost their homes, they lost their jobs, their businesses. There were all kinds of impacts and it really raised the issue that we had gaps to cover and the CFPB was assigned to.

REICHARD: Yet Bahnsen points to the unintended consequences of well-intentioned people. Layers of regulations have burdened small banks in a way that just doesn’t affect big banks. The CFPB reduced or removed overdraft fees for example, which led small banks to end points and rewards programs on their credit cards that consumers liked. That weakened the small banks. For big banks, those fees are only a small portion of their business so they find ways to absorb the costs.

BROWN: Bahnsen says those unintended consequences of CFPB rules hurt the very people the agency was created to protect.

BAHNSEN: There's no question that a focus on things like pay paycheck loans, where where people are able to get loans on Pay Day at high interest rates a couple days early before their paycheck has come for low income people that are in need of extra liquidity, that those things sound like they're really helping people, because these are high fees, and it sounds predatory, and yet, there's no question that the consumers receiving those loans vitally needed them. And so what they did is demonize an element in the economy that was actually needed by low income people that the CFPB says they were there to protect. And so their efforts there harmed those that they were there to protect by taking away a form of liquidity that was necessary to people who didn't have necessarily another avenue. And all it did is force them into a black market, loan sharks, other, you know, arrangements of desperation, that were suboptimal in every way.

Rust sums up his take on that argument:

RUST: You don't want access to dangerous services. That's not what anyone wants. And if you want to argue that it's the underserved that are going to be the ones that lose out on access to credit, well, essentially what you're saying is the underserved won't have access to dangerous credit.

REICHARD: The larger question brings to mind a famous exchange from 1979 between economist Milton Friedman and talk show host Phil Donahue. Donahue asked if it isn’t better to let the experts govern us?

FRIEDMAN: You know, I think you're taking a lot of things for granted. Just tell me where in the world you find these angels who are going to organize society for us?

BROWN: That argument aligns with people who oppose the creation of the CFPB and see it as an unnecessary intervention in the free market.

REICHARD: Yet supporters say financial institutions left unchecked have a history of preying on the vulnerable. And without an independent CFPB, they argue, the burden falls disproportionately on consumers alone to figure out the complexities of the financial system.

BROWN: Meanwhile, the agency’s fate remains uncertain. President Trump has made known his desire to dismantle the CFPB. And McKernan, his nominee to lead it, has pledged to enforce consumer financial laws but also criticized what he calls the agency’s ‘excessive enforcement.’

As the full Senate prepares to vote for a new director of the CFPB, one thing is clear: a number of lawsuits are pending, and the battle over the CFPB isn’t over.

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