March 27, 2013

The CFPB Has a Partial Epiphany

Hester Peirce

Former Senior Research Fellow
Summary

Regulation is not always the answer. It can hurt not only the entities that have to comply with the new rules, but the consumers they serve.

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"Regulations can have many benefits for consumers, but the benefits sometimes come at a cost." That revelation came in a blog post last week by the Bureau of Consumer Financial Protection. The bureau is planning to look at the costs related to rules it has "inherited from other agencies." The CFPB's concession that sometimes regulations impose costs offers only a small measure of hope. Implicit in the bureau's statement is a belief that consumers invariably benefit from regulation. Regulation is not always the answer. It can hurt not only the entities that have to comply with the new rules, but the consumers they serve.

The CFPB plans to start its cost inquiry by talking to banks about how much they are spending on compliance related to deposit products and services. Banks might be reluctant to talk to the bureau, which refers to its compliance staff as "boots on the ground" and, worse, has the unconventional habit of bringing enforcement attorneys along on routine compliance examinations.

If banks are able to get past understandable concerns about talking to the bureau, they may make comments similar to the following response to the CFPB's blog post: "We are a community bank of roughly $1 Billion in assets. Our compliance department consists of 4 people. There is literally not enough time in the day to read and interpret all of the newly issued regulations while keeping up with our daily compliance responsibilities. We have highly competent compliance personnel, but the mere volume of regulations is overwhelming." The other commenters echoed the sentiment about being overwhelmed by the quantity of regulations.

Even if banks don't invoke much sympathy when they complain about the costs of regulation, consumers are affected too. Banks covered by the CFPB's regulations will pass regulatory costs on to consumers and, if consumers won't bear the added cost, the banks may simply stop offering the products. As one commenter responding to the bureau's blog post explained, "Unfortunately, the increased regulatory costs are making some of our products unprofitable, and we are therefore looking at eliminating them. This ultimately hurts consumers as we will not be able to offer the same range of product offerings as before." Another commenter similarly remarked, "There is also no doubt that costs are higher and product offerings will decrease as your [Qualified Mortgage/Ability to Repay] rule and the remittance transfer rule become effective."

The CFPB's plan to look only at compliance costs associated with regulations already on the books misses the bigger picture. A few limited changes to old regulations-which is all the bureau seems to be contemplating-will not be enough to offset the CFPB's new regulations, particularly if those new regulations are put into place without proper analysis. The CFPB is required by law to take into account the costs of the new rules it adopts, but has taken a rather casual approach to this task. As the Mercatus Center's Todd Zywicki explained regarding one of the bureau's key rulemaking efforts-the Qualified Mortgage/Ability to Repay rule-the CFPB employs an undisciplined approach to rulemaking. Its analysis is designed to justify its policy conclusions rather than illuminate the real effects of its rules.

CFPB Director, Richard Cordray observed in a recent speech, "when you cannot access credit, it can be nearly impossible to move forward-you cannot find ways to qualify for the basic means of self-improvement." Mr. Cordray was not thinking about regulatory obstacles to credit when he made that comment, but he should have been. The bureau needs to look at the entire burden imposed by its regulations-the costs to the entities covered by its rules and the burden on the consumers whose chances for self-improvement those rules constrain.