During Richard Cordray’s tenure as director of the Consumer Financial Protection Bureau, the CFPB pummeled American consumers and the economy while doing little to promote financial stability. The pain was especially acute for low- and middle-income consumers who lost access to credit cards, faced higher bank fees and reduced access to free checking, and found it harder and costlier to obtain mortgages, especially as first-time homebuyers. In response, consumers turned to payday loans and alternative products as financial life rafts—only to have Mr. Cordray poke holes in them by imposing regulations that would effectively outlaw payday lending.
Yet despite its rocky start, the original promise of the CFPB is sound: to protect and empower consumers, promote fair and competitive markets, and stabilize the financial system. Well-designed consumer-credit regulation and vigorous enforcement of consumer-protection laws make markets more transparent and give consumers confidence to borrow and save. But poorly designed regulations choke off access to credit, drive up interest rates and eliminate choices, forcing consumers to turn to less desirable financial options—even loan sharks. A signature achievement of President Trump’s first year was regulatory reform aimed at restoring the rule of law and promoting economic prosperity. Mick Mulvaney, the CFPB’s acting director, announced in a staff memorandum last month that the bureau will go in a different direction under his leadership, and he has already started rolling back some of the its most harmful regulations. As Mr. Mulvaney, or his permanent successor, considers how to reorient the agency further in the interest of protecting consumers, he should consider five guiding principles: inclusion, innovation, choice, competition and respect. • Inclusion. The unintended consequences of Obama -era regulations fell hardest on lower-income families. Regulations that eliminate credit options for those who already have few of them will not make their lives better. Working with the private sector and Congress to reverse this growing exclusion of Americans from the financial sector is a moral imperative. • Innovation. New financial technologies have the potential to disrupt consumer banking in ways that would benefit consumers. Yet the CFPB has stifled innovation at every turn. Nontraditional credit scoring and underwriting models rooted in Big Data offer hope for those who don’t have access to mainstream banking. Mr. Mulvaney should abandon the agency’s “regulation by enforcement” approach, which discourages experimentation by heightening the risk of retroactive liability. The bureau can help unleash the power of FinTech by invigorating dormant tools like the no-action letter program and Project Catalyst, a CFPB initiative designed to facilitate “consumer-friendly innovation in markets.” • Choice. American families know better than bureaucrats what financial products best meet their needs. One justification for the CFPB’s broad scope of authority was to enable it to oversee the entire consumer-credit ecosystem and break down the traditional regulatory silos that focus on who issues financial products instead of how consumers use them. The CFPB should concentrate its efforts on empowering families instead of banning products or using trendy behavioral-economics theories to “nudge” consumers toward decisions central planners favor. • Competition. Excessive regulation disproportionately drives up costs for small banks and credit unions, forcing them to close, merge or restrict offerings. A 2014 Mercatus Center survey found many small banks were discontinuing mortgage lending because of Dodd-Frank and almost 3 out of 4 said the CFPB was affecting their business. Moreover, because small banks provide the bulk of the nation’s small-business and agricultural loans, their struggles contributed to the meager job creation and weak economic recovery during the Obama years. • Respect. When the CFPB prototype was first proposed nine years ago, I wrote in these pages that the architects of the new agency should “treat borrowers like adults.” Instead, Mr. Cordray’s CFPB viewed consumers as too dumb, irrational or vulnerable to make their own decisions about whether to enter into a contract with an arbitration clause, take out a payday loan, or bargain with a car dealer over an auto loan. Protecting consumers from unfair and deceptive actions by financial institutions is the CFPB’s core mission. But not every consumer who fails to pay his bills is a hapless victim. Smarter regulation would recognize this. During the financial crisis, for example, millions of borrowers walked away from mortgages they could afford to pay simply because they were underwater. But the CFPB’s mortgage rules are designed only to ensure that borrowers have the ability to pay; they do not consider precautions such as requiring larger down payments that would address the incentive to default strategically when housing prices fall. As a result, despite imposing billions in regulatory compliance costs, there is no evidence the CFPB’s rules would have materially reduced foreclosures had they been on the books during the housing crisis. Mr. Mulvaney has taken decisive steps toward reforming the CFPB. Now comes the more crucial step—building a framework of consumer financial protection that restores the rule of law and contributes to economic prosperity. Mr. Zywicki is a professor at George Mason University’s Antonin Scalia Law School and a former director of the Federal Trade Commission’s Office of Policy Planning. Appeared in the February 20, 2018, print edition. • Inclusion. The unintended consequences of Obama -era regulations fell hardest on lower-income families. Regulations that eliminate credit options for those who already have few of them will not make their lives better. Working with the private sector and Congress to reverse this growing exclusion of Americans from the financial sector is a moral imperative. • Innovation. New financial technologies have the potential to disrupt consumer banking in ways that would benefit consumers. Yet the CFPB has stifled innovation at every turn. Nontraditional credit scoring and underwriting models rooted in Big Data offer hope for those who don’t have access to mainstream banking. Mr. Mulvaney should abandon the agency’s “regulation by enforcement” approach, which discourages experimentation by heightening the risk of retroactive liability. The bureau can help unleash the power of FinTech by invigorating dormant tools like the no-action letter program and Project Catalyst, a CFPB initiative designed to facilitate “consumer-friendly innovation in markets.” • Choice. American families know better than bureaucrats what financial products best meet their needs. One justification for the CFPB’s broad scope of authority was to enable it to oversee the entire consumer-credit ecosystem and break down the traditional regulatory silos that focus on who issues financial products instead of how consumers use them. The CFPB should concentrate its efforts on empowering families instead of banning products or using trendy behavioral-economics theories to “nudge” consumers toward decisions central planners favor. • Competition. Excessive regulation disproportionately drives up costs for small banks and credit unions, forcing them to close, merge or restrict offerings. A 2014 Mercatus Center survey found many small banks were discontinuing mortgage lending because of Dodd-Frank and almost 3 out of 4 said the CFPB was affecting their business. Moreover, because small banks provide the bulk of the nation’s small-business and agricultural loans, their struggles contributed to the meager job creation and weak economic recovery during the Obama years. • Respect. When the CFPB prototype was first proposed nine years ago, I wrote in these pages that the architects of the new agency should “treat borrowers like adults.” Instead, Mr. Cordray’s CFPB viewed consumers as too dumb, irrational or vulnerable to make their own decisions about whether to enter into a contract with an arbitration clause, take out a payday loan, or bargain with a car dealer over an auto loan. Protecting consumers from unfair and deceptive actions by financial institutions is the CFPB’s core mission. But not every consumer who fails to pay his bills is a hapless victim. Smarter regulation would recognize this. During the financial crisis, for example, millions of borrowers walked away from mortgages they could afford to pay simply because they were underwater. But the CFPB’s mortgage rules are designed only to ensure that borrowers have the ability to pay; they do not consider precautions such as requiring larger down payments that would address the incentive to default strategically when housing prices fall. As a result, despite imposing billions in regulatory compliance costs, there is no evidence the CFPB’s rules would have materially reduced foreclosures had they been on the books during the housing crisis. Mr. Mulvaney has taken decisive steps toward reforming the CFPB. Now comes the more crucial step—building a framework of consumer financial protection that restores the rule of law and contributes to economic prosperity. Mr. Zywicki is a professor at George Mason University’s Antonin Scalia Law School and a former director of the Federal Trade Commission’s Office of Policy Planning. Appeared in the February 20, 2018, print edition.
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