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Consumer bureau harms Americans when it picks the winners and losers
November 3, 2017
The Consumer Financial Protection Bureau states its mission is to “make consumer financial markets work for consumers, responsible providers, and the economy as a whole.” However, the reality is the bureau does not regard all consumers in the market equally. In the interest of political expediency, it seems to treat consumers who deal with some institutions different than those who deal with others.
These exemptions create a disturbing trend where the government picks winners and losers. Moreover, these exemptions limit consumer choices for Americans based on which bank they use. Just a few weeks ago, the CFPB issued its regulation restricting short-term, small-dollar loans. The final rule was designed to target payday lenders, but it also seriously curtails options for families wishing to turn to their bank during times of financial hardship.
Among the many exemptions in the rule, the CFPB will allow banks to make up to 2,500 short-term, small-dollar loans every year. From my perspective, things are either fish or fowl. If the CFPB says something is good for the first 2,499 people that walk into a bank, why does the CFPB think it is bad for everyone that walks in after that?
If the CFPB’s goal is consumer protection and the bureau is comfortable with an institution making up to 2,500 of these loans every year, then excuse me for not understanding why other consumers who need short-term financing have to cross the street to a pawn shop or find a risky source of financing to meet their needs. The exemption was designed to placate small banks, which are the more likely to keep their loans under the threshold. Larger banks, that have many more customers, would exceed this cap easily. I simply believe every customer should be entitled to the same services, and that is not what this rule subscribes.
Historically, federal banking regulators have encouraged banks to help finance the short-term credit needs of their customers and some banks have chosen to do so with deposit advance products, which are carefully designed loans with strong safeguards, at reasonable prices for consumers and banks. Regulators once encouraged this type of product because they served an important market and were safe and secure. Services offered by banks were only available to established customers who had maintained an existing checking account and were not available to just any consumer walking in off the street.
As a result, these short-term loans from banks had low default rates and offered protections that payday lending typically did not. In 2013, however, federal regulators issued a very strict set of guidelines for banks offering deposit advance, all but eliminating the product. The CFPB should have issued a rule opening this option up for families experiencing a temporary tight financial situation due to an unforeseen emergency or expense.
The CFPB’s current director, Richard Cordray, has said, “Whatever you think about government regulation, it cannot work in a piecemeal or patchwork manner, by having a system that addresses some competitors while leaving others alone.” I could not agree more. If small banks can make accommodation loans to help their customers, the customers of larger institutions should get the same valuable products.
But this is much bigger than small-dollar loans. It is about fairness, a level playing field and giving consumers options. It is also about the amount of power given to a single person, who is largely unaccountable, at a government agency. The CFPB was created in 2011 with a single director and at the end of the day, he is the judge and jury for every rule the bureau issues.
Unfortunately, the CFPB has become a partisan lightning rod in Washington. I believe there is a common sense middle ground between the status quo and shuttering the bureau. Enacting a bipartisan commission, like almost every other federal regulatory agency in the country, would promote accountability, transparency and fairness to ensure a variety of views are represented. It would also ensure a single, unelected bureaucrat is no longer able to limit options for American families by picking winners and losers.
Richard Hunt is president of the Consumer Bankers Association.