July 21, 2013

First, Do No (More) Harm

Todd Zywicki

George Mason University Foundation Professor of Law, Antonin Scalia Law School, George Mason University
Summary

With the Senate’s confirmation of Richard Cordray as director of the Consumer Financial Protection Bureau the agency’s authority to oversee lending practices, in limbo for the two years of its existence, has been affirmed.

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The New York Times Room For Debate posted this question, "How can the freshly empowered agency have the strongest and most immediate impact?"

With the Senate’s confirmation of Richard Cordray as director of the Consumer Financial Protection Bureau the agency’s authority to oversee lending practices, in limbo for the two years of its existence, has been affirmed.

How can the freshly empowered agency have the strongest and most immediate impact?

Todd Zywicki provided the following response:

To fulfill its promise to promote consumer protection and fair competition, the Consumer Financial Protection Bureau must avoid two crucial errors.

First, the bureau should follow the Hippocratic oath and do no (more) harm. Since the financial crisis, Washington has unleashed a surge of misguided regulation unprecedented in recent economic history. The Credit Card Act of 2009 interfered with the ability of credit card issuers to price risk accurately, thereby depriving many low-income consumers of credit cards. Then the Durbin Amendment to Dodd-Frank imposed price controls on debit card interchange fees, leading to a dramatic increase in bank fees and a loss of free checking for millions of consumers. In addition, bank regulators imposed new limits on access to overdraft protection by consumers. According to the F.D.I.C., one million consumers — mainly low income — lost bank accounts between 2009 and 2011.

This regulatory onslaught has reduced access to credit cards and bank accounts for millions of consumers, mainly vulnerable low-income consumers already living on the financial fringe. Meanwhile products like payday lending and pawn shops have had double-digit growth. The Consumer Financial Protection Bureau’s first task should be to understand the negative unintended consequences created by earlier regulation and avoid imposing further regulation that would deprive vulnerable consumers of their remaining financial life rafts.

Second, if bureau does decide to impose new regulations, it should avoid new regulations that will provide a competitive advantage for one product over comparable products. For example, many consumers use both payday lending and bank overdraft protection as short-term credit products, and both products raise similar consumer protection concerns. In considering new regulation of these products, therefore, the bureau should avoid acting in a manner that harms consumers by pushing them to use one product rather than the other.