How to Improve Rulemaking at the CFPB

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When the Consumer Financial Protection Bureau (CFPB) was established in 2010 as part of the Dodd-Frank Act, it was intended to be a “21st century agency” that used hard data and analysis to develop well-crafted regulations. For all the promise, however, the bureau has failed to live up to its commitments.

To date, the Bureau’s rulemakings—such as for rules regarding arbitration, prepaid cards, and payday loans—have not been based on robust research or consumer desire for regulation. Instead, they have been driven by the Bureau’s ideological hostility to the financial services industry.

Take the payday loan rule. The Bureau began studying the payday lending market in January 2012 in preparation for a rulemaking. This was just six months after the agenvy officially opened, even as it dealt with the enormous task of setting up a new government agency and writing required new rules, and despite no Congressional mandate or consumer complaint data at the time.

Even worse, the consumer complaint database that the Bureau administers reports that payday loans made up 1 percent of all consumer complaints, while auto-title loans, which were also included in the rulemaking, made up 0.1 percent of all complaints. This kind of data theoretically guides the Bureau’s rulemaking; it is not persuasive that there was ever a consumer protection problem to begin with.

Because Congress delegates such immense legislative power to the Bureau while abdicating oversight over its operations, it is especially important to consumers, businesses, and democratic governance that the CFPB institute an accountable and transparent rulemaking process.

Absent legislative changes, the burden of improving agency accountability, transparency, and integrity falls on the Bureau itself. That is why it is encouraging to have Acting Director Mick Mulvaney seek public comment on a whole range of the Bureau’s operations, including its rulemaking process, for which CEI submitted comments this week.

We have a number of ideas for how the Bureau could improve its rulemakings. For instance, the Bureau relies far too heavily on behavioral economics (BE) to justify regulation. Very few studies, however, demonstrate beyond a theoretical level that cognitive biases of consumers either exist or are prevalent in the marketplace, let alone whether government intervention can  solve such a problem.

Interestingly, while the Bureau seems to believe that the insights of BE are new, they are not fundamentally different from other paternalistic arguments. The idea that consumers are manipulated into making credit decisions that are not in their best interest has been around for centuries.

During much of the 20th century, for example, consumer credit was considered only appropriate for wealthy men, as women and the poor were 
seen as not “cognitively fit” to use credit responsibly.

Similarly, the Bureau has used BE to claim that consumers are not “cognitively fit” enough to understand even the most basic of financial products. This, of course, leaves the enlightened bureaucrats at the CFPB to decide what is and is not appropriate for consumers. It is not hard to see why behavioral economics may be considered to be little more than the “applied theory of bossing people around,” as economist Deirdre McCloskey described it.

Another major problem is the Bureau’s cost-benefit analysis. To date, the analysis provided for proposed rules has been wholly inadequate. To take the payday loan rule as another example, the analysis provided by the Bureau offered no serious collection, quantification, and analysis of the costs, while merely offering up abstract qualitative benefits to the proposed regulation.

One of the most egregious examples is the Bureau disregarding the concern that consumers may turn to black market lenders when they cannot access lawful loans. Out of a 1,700-page rule, the concern was waived away in a single footnote, despite there being a wealth of evidence to suggest that black market lending will only increase under the new regulations.

The Bureau must take its cost-benefit analysis more seriously. Establishing an Office of Cost Analysis would go a long way to improving the Bureau’s rulemaking process.

Given the CFPB’s structure, with an all-powerful director who can unilaterally shape much of its operations, Acting Director Mulvaney has immense authority to institute more rigorous rulemaking requirements. We offer up a number of specific suggestions for reform in our comments, including:

·        Putting the Bureau on a regulatory budget;

·        More carefully considering the effects of regulation on financial innovation;

·        Creating a more transparent rulemaking process by enabling third-party access to economic data and methodology;

·        Doing rigorous cost-benefit analysis of existing regulations;

·        Including sunset clauses in discretionary rulemakings;

·        Creating a small business liaison to communicate and coordinate rulemakings with the Small Business Administration; and

·        Prioritizing required rulemakings over discretionary rulemakings.

The Bureau’s rulemaking should be guided by well-researched, thoroughly justified, and appropriately crafted rules that implement the intent of Congress in the most efficient way possible. Regrettably, this largely has not been the case. Acting Director Mulvaney has an opportunity to repair  this broken process.