Wright & Zywicki on the Consumer Financial Protection Agency Act of 2009

Josh Wright —  19 September 2009

I noted last week that my colleague (and Volokh Conspirator) Todd Zywicki and I had written an essay, published in a Fin Reg 21 Symposium on the Consumer Financial Protection Agency Act of 2009, on “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009.”  The essay is now available on SSRN for interested readers (link above).  Here is the abstract:

The creation of a new Consumer Financial Protection Agency (“CFPA”) is a very bad idea and should be rejected. The proposal is not salvageable and cannot be improved in substance or in form. The foundational premise of the CFPA is that a failure of consumer protection, and specifically irrational consumer behavior in lending markets, was a meaningful cause of the financial crisis and that the CFPA would have or could have averted the crisis or lessened its effects. To the contrary, there is no evidence that consumer ignorance or irrationality was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred. The CFPA is likely to do more harm than good for consumers. In this article, we highlight three fundamentally problematic truths about the CFPA: (1) The CFPA is premised on a flawed understanding of the financial crisis, (2) the CFPA will have significant unintended consequences, including but not limited to reducing competition, consumer choice, and availability of credit to consumers for productive uses; and (3) the CFPA creates a powerful bureaucracy with undefined scope, risking expensive and wasteful regulatory overlap at both the federal and state levels without any evidence of its own expertise in the core areas it is designed to regulate.

Another colleague and Volokh Conspirator, Ilya Somin argues here that political ignorance and cognitive biases exhibited by voters provide yet more reasons to object to the CFPA.  Ilya’s second point, that political ignorance and voter irrationality make regulatory institutions more susceptible to regulatory capture, is an especially important one in this debate.  Not to mention the frequently discussed problem of irrational regulators and judges.  More generally, Ilya gives another reason to believe that the claim that consumer (and voter) irrationality counsels in favor of more regulation rather than less is both under-theorized and not supported by the existing evidence.

4 responses to Wright & Zywicki on the Consumer Financial Protection Agency Act of 2009


    Does more government control and less consumer choice sound familiar? The Consumer Financial Protection Agency (CFPA) is a new government agency designed to regulate consumer financial products. We need to support effective consumer protection that ensures concise disclosures about risks associated. Visit http://www.friendsoftheuschamber.com/issues/index.cfm?ID=469

    John L. Davidson 21 September 2009 at 3:46 pm


    Simple reasoning tells us that you didn’t work in the industry and that you have no idea what you are talking about.

    Take a low doc loan. A low doc loan couldn’t hurt a consumer, if the house was worth the amount of the loan. This would be the case, if the house was properly appraised.

    The consumer could just sell the house and pay off the loan, as soon as they understood that couldn’t afford the payments, which was generally the first month after closing.

    For a consumer to face at loss (at the center of every loan you write about) there had to be a fraudulent appraisal. Without that appraisal, that loan cannot be made, regardless of how many lies are told to the borrower.

    If the appraisals weren’t fraudulent, how do you explain the trillons of dollars in difference between the fact amount of the loans and the amount these homes will now bring, if sold?

    I have worked in matters where a single appraiser was paid cash for inflated appraisals on hundreds of properties. There were no controls over these activities. Look at Countrywide, etc., The list is endless. Every major loan broker is out of business because of this.

    Having worked 35 years in the industry, I know first had that the key to the entire fraud was false, overstated appraisals.


    I worked in the mortgage and real estate industry and I completely disagree with you. Loan officers and mortgage brokers made some very unusual products, including no doc loans, seem very normal. They told customers they could afford these loans and related their experiences putting similarly situated customers into these loans. In many cases, they completed the loan documentation, so the consumer had no idea they were applying for loans with false information. You post indicates that you have little experience in this area. I’d suggest you do your homework before you write about something you know little about.

    John L. Davidson 19 September 2009 at 7:59 pm

    I hate to bother you with the facts, but the principal cause of the financial crisis was fraudulent real estate appraisals, which permitted the writing of billions of dollars in bad loans. Because of three or four legal doctrines, the consumers to whom these loans were made have no legal recourse against either the lenders or appraisers who worked this fraud. In no particular order, the legal doctrines were: (1) lack of privity–the appraisers are hired by the lender, not the borrower; (2) lack of duty, by both lender and appraiser to he borrower; (3) state laws that protect lenders, unless the promise is in writing; and (4) the gutting of the securities laws in Central Bank of Denver.

    Hopefully, a new Consumer Financial Protection Agency can attack this pernicious legal doctrines.