The Consumer Financial Protection Bureau was conceived in the aftermath of the 2008 crash as a solution to the many harms consumers suffered at the hands of predatory lenders.
The idea made sense. An agency dedicated to the protection of consumers from financial harm is a worthy concept.
The difficulty lies in how it actually works.
Not just another regulator
Unlike the Federal Reserve, the Comptroller of the Currency, and FDIC, whose supervisory successes have been loudly derided—usually because of something a finance company did—CFPB has adopted the Federal Trade Commission’s enforcement technique. The question is whether that technique actually works.
The prudential regulators, FRB, OCC, and FDIC, follow a supervisory method, conducting regular examinations of the banks they regulate. Examinations are complete in that they review compliance with all applicable regulations and requirements. A compliance examination conducted by a prudential regulator looks at the overall risk management program, the compliance program, and each department or function within the bank.
An examination may identify violations, but more frequently an exam identifies weaknesses that, if not attended to, could lead to future violations. A good examination by a prudential regulator is like a thorough physical exam. Everything significant gets checked.
CFPB’s approach is very different. The bureau uses a targeted approach, rather than a comprehensive examination. CFPB begins with a potential consumer harm based on information received from complaints, comments, and other sources. Based on this consumer input, CFPB flags certain practices, such as sales of credit card add-on products or aggressive debt collection tactics. Once the problem is selected, CFPB then looks for likely targets—companies that offer the product or service under scrutiny.
When CFPB goes in to examine an institution that has been targeted for possible enforcement, the examiners look specifically at the issues of concern. They do not conduct a comprehensive full-scope examination. There is no assessment of the overall management of risk and compliance in the institution.
Unlike the prudential agencies’ examinations, this is not a full-scope physical. It is more like emergency room treatment of a specific problem.
Aiming for compliance by making someone an example
CFPB explains that its enforcement actions are intended to put the industry on notice that a certain practice is a problem. The theory is that one or two very public enforcement actions will persuade the entire industry to comply.
The reality is that compliance doesn’t happen that way.
Like prey hiding from a predator, those not targeted lay low until the predator has gone away with a meal. Then they come back out.
The technique used by CFPB is inherited from FTC. Targeting, investigating, and taking enforcement action is FTC’s method. FTC does not have examiners, so examinations are out of the question.
By contrast, the bureau was specifically staffed with examiners. Admittedly the number of examiners available to the bureau is much less than what would be needed for full-scope examinations.
But rather than cooperate with the prudential agencies to make maximum use of examiners, CFPB has chosen to use examiners as investigators.
Looking at CFPB’s results
So the question becomes, does CFPB’s method work?
There is a simple way to figure out whether CFPB’s enforcement technique is more effective than that of the prudential regulators. Compare the results.
FTC has used the target-and-sue enforcement technique for decades. Prior to the creation of CFPB, FTC had sole responsibility for enforcement of consumer financial protection laws for nonbanks—such as finance companies, retailers, and mortgage companies. To determine which enforcement method works best, compare FTC’s results to those of the prudential regulators.
Consumers have complained loudly about “banks,” but they call any company that makes a loan a “bank.” The fact is that banks have done a good job with their consumer customers. They do business with the goal of a long-term relationships with consumers—and the knowledge that the next examination is right around the corner.
Finance companies, though called “banks” by consumers, are a different matter. Most finance company products are designed to make the profit at the front end. What happens after that isn’t their problem—if they can sell the loan.
Most of the predatory lenders identified were finance companies, not banks. This says everything about the difference between targeted enforcement and regular examinations.
What the bureau is doing is exactly what FTC was doing. It didn’t work for FTC and it won’t work for CFPB. And that means that consumers aren’t getting the protections they deserve.