In the wake of his resignation, CFPB Director Richard Cordray has been portrayed either as the “true champion of American consumers” or an ambitious regulator unwilling to stop at procedural, constitutional, or ethical bumps in his campaign to enrich trial lawyers and enhance his own political prospects. I’m not exactly a Cordray fan. The man had a unique opportunity to redesign the U.S. consumer-protection framework and instead led an agency that released rules that more often than not exceeded 2,000 pages no one could understand absent continuing “clarifications,” “guidance,” and “updates” that did little for consumers and much for compliance consultants. Still, it’s true that consumer financial protection before the crisis was woeful, with the banking agencies more focused on protecting themselves than consumers. U.S. economic equality depends on fair, open access to wealth-preserving and -enhancing financial services, which is why the Bureau to date has been so disappointing and the Bureau to come may do still worse.
What’s really disheartening about the CFPB under Mr. Cordray is how much good it could have done and how the little it did will now be reversed in an excess of zeal to erase his partisan, single-minded legacy. Think for example of the recent payday-lending rule. Short-term installment lending can indeed trap vulnerable borrowers in a cycle of more and more debt that makes them less and less secure. However, the agency’s recent payday rule so sanctions reasonable short-term lending products that it readily acknowledges that it will force borrowers instead to turn to pawn shops. Astonishingly, pawn shops are seen as better protectors of consumer economic security than an array of regulated installment products. As I noted in a recent post on our Economic Equality blog, the hard truth is that short-term installment lending that tides borrowers over from pay check to pay check are never a “good” product. Far better for individuals to watch their expenses and save their money. The problem is that many can’t do so because they earn too little, housing costs too much, day care is hard to find, and employment – statistics be damned – is still down and out for low-skilled, low-wage workers. Balanced rules would find a way to get consumers some of the short-term loans they need from the few regulated companies willing to provide them; the CFPB’s rule sends those already at great economic risk into still more of harm’s way.
With the payday rule published in today’s Federal Register, it will stand for only as long as it takes for the new Acting Director to reverse it or Congress to reject it. The problematic standard will now be withdrawn. Too bad, since it’s also true that all too much payday lending is viciously predatory. A balanced CFPB rule would not only have provided reasonable lending for urgent financial needs, but also insulated the short-term lending landscape from products that demonstrably put borrowers at long-term risk in return for a bit of short-term relief. Erasing an unreasonable rule may give consumers better options than the pawn shop, but it also opens the way for all the abuse that led Congress in 2010 to ask for a federal payday framework.
Sadly, the mood in the nation’s capital is too uncompromising for constructive CFPB reform. When Sen. Warren first proposed the original construct for the CFPB, it was a five-member commission, not a sole director. Now, mention the concept of turning the Bureau into a commission, and Sen. Warren leads the crusade against a whiff of change.
Mr. Cordray’s fans confused support for him with building a more resilient organization that would stand firm from one administration to another. As Sen. Warren soon will learn, take out Mr. Cordray and replace him with, say, the current OMB Director and one gets a very different CFPB. Take out one Fed chair and replace her with another, not so much and the reason for this is rooted in a combination of institutional credibility and a multi-member governing structure.
Sen. Crapo has suggested that he may try again to create a Consumer Financial Protection Commission. Sen. Warren might want to rethink her latter-day opposition. As she initially thought, a commission may well be slow and compromising, but it’s a proven way to craft policies that stand the test of time rather than swing so wildly from political extremes that the interests they were supposed to protect – vulnerable consumers – are lost in the fray.