Which CFPB Will We Get?

Cite this Article
Josh Wright, Which CFPB Will We Get?, Truth on the Market (September 17, 2010), https://truthonthemarket.com/2010/09/17/will-cfpb-will-we-get/

Todd mentions Elizabeth Warren’s “kick off” speech for the CFPB, in which she accepts the new “President and Special Advisor to the Secretary of the Treasury?” gig, and tells us what the new Bureau is all about:

The new consumer bureau is based on a pretty simple idea:  people ought to be able to read their credit card and mortgage contracts and know the deal.  They shouldn’t learn about an unfair rule or practice only when it bites them—way too late for them to do anything about it.  The new law creates a chance to put a tough cop on the beat and provide real accountability and oversight of the consumer credit market.  The time for hiding tricks and traps in the fine print is over.  This new bureau is based on the simple idea that if the playing field is level and families can see what’s going on, they will have better tools to make better choices.

Like Todd, I find this articulation of the mission relatively innocuous.  Of course, that is different from believing that even this narrowly defined mission will be successful in generating new consumer benefits.  And as Todd notes in his post, there are reasons to be skeptical about whether or not even this narrow mission will succeed.

Todd writes that he doesn’t doubt Professor Warren’s sincerity about this mission.  Nor do I.  But I do believe that the “real” mission of the CFPB isn’t simply disclosure of terms and hidden fees.  I suspect so do its supporters — of which I am not one.

Why do I think the mission is broader than disclosure?  First, I doubt there would quite the fuss that we’ve seen over who runs the Bureau if all that were at stake was who would oversee the imposition of a set of mandatory disclosures on credit cards and other loans.  More importantly, I predict a more ambitious CFPB because both Professor Warren and others have themselves advocated for a much broader vision.  As I’ve observed (and written about elsewhere with economist David Evans):

[T]he blueprint for what was then the Consumer Financial Protection Agency was based in large part on using the insights of behavioral economics to design regulation in consumer credit markets.  Advocates of behavioral law and economics have generally taken a dim view of consumer borrowing, arguing that consumers over-value current consumption and do not adequately account for the costs of repayment in the future.  Policy proposals from this literature include a variety of prohibitions of consumer lending, including restrictions on subprime lending, payday lending, banning credit cards, unbundling the transacting and financing services offered by credit card companies, and usury laws.

An evaluation of the proposals emerging out of the behavioral law and economics literature concerning consumer credit go far beyond mandatory disclosure.  The much-discussed “plain vanilla” requirement, for example, reaches into the realm of product design.  But even a cursory read of this literature, including proposals from Elizabeth Warren and Michael Barr, reveals much more ambitious proposals that run much greater risks for consumers.   Moreover, many of these proposals are grounded in the behavioral economics tradition, and embrace the view that consumers are systematically irrational when it comes to financial products and that the government would make better decisions for consumers for their own protection.

As I’ve pointed out with Evans (and again with Todd Zywicki), the behavioral advocates have not adequately made their case as a matter of economic theory or empirical evidence, nor have they sufficiently overcome concerns that the behavioral approach satisfies a careful cost-benefit analysis that accounts for the dynamic costs of dampening individual incentives to improve decision-making and regulator error.  Unfortunately, it is not difficult to find examples of exactly this type of error.  The potential for false positives with this approach is incredibly high.  And the costs of false positives, and the total costs imposed on consumers, exacerbated by the opportunity for even stricter state law measures.

The CFPB in Elizabeth Warren’s “mission statement” is a different, and less ambitious CFPB than described in Professor Warren’s academic work, and in the work of those advocating a behavioral approach to consumer credit.  Which one will we get?  Theory and data suggest that when confronted with a choice between narrow and less powerful regulator and one with more power and a broader mandate, the smart money is that we’ll observe the latter.  If that prediction holds true, and we get the CFPB promised by its advocates when they contemplated its design, access to consumer credit will fall and there is a significant risk that consumers will be made worse off on the whole.

Here’s to hoping we get the less ambitious CFPB promised in Professor Warren’s press release.