Kathy Kraninger, newly minted director of the Consumer Financial Protection Bureau (CFPB), gave her first major policy speech in April. She laid out a vision for the bureau that is transparent, rule-based and cautious.
Judging by both this speech and Kraninger’s actions during her first few months in office, U.S. consumers have cause for optimism about her tenure.
Kraninger affirmed the CFPB’s four pillars — education, regulation, supervision and enforcement — while laying particular emphasis on the first. Agencies, she said, are often judged by their “output,” i.e., how many complaints the bureau has handled or how much money it has recovered. But this metric is misguided, or at least incomplete.
If the bureau’s primary goal is to foster a financial system that works, judging its success or failure will require looking at more than just enforcement actions. Indeed, sometimes overzealous enforcement actions can create more problems than they solve.
In a similar vein, perhaps most encouraging were her comments on rulemaking. In its short history, the CFPB has pursued certain policies with a single-mindedness that was imprudent and at times even shocking. Two such policies pursued by the bureau pre-Kraninger include rules on arbitration and small-dollar loans.
In 2017, the bureau took aim at the use of mandatory arbitration in disputes between financial companies and consumers, instead hoping to spur more class-action lawsuits.
But while class-action excels at grabbing headlines and enriching lawyers, consumers gain little by it. According to the CFPB’s own admission, buried in a footnote within the final rule, consumers receive an average of $32 through class action settlements — and $5,400 through arbitration.
Ultimately, Congress intervened to repeal the rule.
Also in 2017, the CFPB released a rule on small-dollar lending. Vehicle title and so-called payday loans were covered by the regulation — although “smothered by the regulation” would be a more accurate description.
Effectively, the rule would have intentionally gutted those lending industries, suddenly removing a credit option used by millions of consumers, the consequences be damned.
Blinkered ideology and a lack of transparency characterized both the arbitration and small-dollar lending rules. New Director Kraninger’s speech on April 17 at the Bipartisan Policy Center signaled a different approach.
The CFPB’s success, Kraninger said, “must be measured by how well we use all of our tools to prevent consumer harm.” Rules should be made and enforcements pursued only if evidence indicates they will benefit consumers. A strong CFPB is one confident enough to show restraint.
The agency has been aligning itself with this new ethic over the past year-and-a-half. A few months after Congress’ intervention on arbitration, the CFPB began backtracking on small-dollar lending, as well.
A leadership change prompted the about-face. Obama-appointee Richard Cordray resigned as the bureau’s director, and Mick Mulvaney soon replaced him as acting director.
Mulvaney — whose appointment was met with protests and a lawsuit — began the hard work of improving the bureau. His tenure was essentially transitional, however. He created a “strategic plan” for the CFPB to become a model of good government but was never going to be around to execute it. That task falls to Kraninger.
In the Bipartisan Policy Center speech, Kraninger made the humble observation that the CFPB “cannot be everywhere, with everyone, at every transaction — nor should it try to be.” This sentiment stands in contrast to some of the more paternalistic inclinations of the bureau’s past policies.
Rather than over-emphasizing this top-down approach to consumer protection, Kraninger stressed that “empowering consumers to help themselves, protect their own interests, and choose the financial products and services that best fit their needs is vital to preventing consumer harm and building financial well-being.”
The primary roles of the CFPB should therefore be educative and supportive, establishing a clear, empirical and rule-based system in which both consumers and businesses can pursue their welfare. To the extent that the CFPB does not do this, it fails.
This brings us back to Kraninger’s comments on rulemaking. She emphasized that rules must be developed as general standards through a transparent and deliberative process. “To develop the best possible rules, the CFPB must use the best possible process.”
“Ultimately,” she said, “I don’t believe anyone benefits from rules that are rushed out the door after having gone through a flawed process. Under my leadership, the CFPB will proceed deliberately and transparently in its rulemakings.”
A year ago, George Mason University law professor Todd Zywicki wrote that, in its short history, the CFPB had “pummeled American consumers and the economy while doing little to promote financial stability.”
He charged the bureau with becoming a force for good by “building a framework of consumer financial protection that restores the rule of law and contributes to economic prosperity.”
Under Kathy Kraninger, the CFPB appears poised to do just that.
Beau Brunson is a senior policy analyst at Consumers’ Research.