Last October, the Consumer Financial Protection Bureau (CFPB) announced its intention to create a Task Force on Federal Consumer Financial Law. Inspired by the 1972 National Commission on Consumer Finance, the task force is intended to examine the whole of consumer finance law academically, something that hasn’t been done since the 1972 commission. Wasting no time, early this January, CFPB Director Kathleen Kraninger announced the members and chairman for the Task Force, putting an exclamation point on her goal of ensuring that the CFPB’s efforts are razor focused on promoting consumer welfare.
The announcement follows two other major efforts designed to inject more rigorous economic analysis into the CFPB, reestablishing the Academic Research Council (ARC) and creating Office of Cost-Benefit Analysis (OCBA). ARC, staffed with professors of economics, finance and law, is tasked with advising the CFPB on the strategies used to quantify the cost and benefits of regulatory actions. Meanwhile, the OCBA will vet all rules and enforcement actions through a small army of economists.
Taken together, the Task Force, ARC and OCBA could help end the economic miscues that plagued early CFPB rules and guidance, playing an essential role in helping the CFPB craft a pro-consumer policy agenda.
This sort of robust economic analysis is hardly new at the federal level. Both the Federal Trade Commission (FTC) and the Federal Communications Commission (FCC) have robust offices that help apply economic analysis to regulatory activity.
At the FTC, the Bureau of Economics helps guide its consumer protection and antitrust activities. Specifically, the FTC’s bureau ensures that regulations enhance long-term consumer welfare and represent consumer interests before various regulatory bodies. The FTC’s bureau is considered the gold standard in government for cost-benefit analysis, and the CFPB wisely intends to model its new office after it. Meanwhile, the FCC’s Office of Economics and Analytics ensures that FCC action is effective, transparent and well-justified. The Office also holds seminars to promote relevant academic research.
The federal government’s limited reporting requirements of regulatory costs warrant a robust OCBA at the CFPB. Agencies are only required to report the costs and benefits of regulations with an economic impact of $100 million or more. Independent agencies – like the CFPB – are not required to report any data to the Office of Information and Regulatory Affairs at all.
James Broughel, a senior research fellow at the Mercatus Center, describes this reporting situation as “abysmal.” Shockingly, the benefits and costs in the federal government’s annual report detailed only 137 of 36,255 final regulations between 2007 and 2016. We need more information, not less, and the OCBA and ARC will help make that happen.
Performing a thorough economic analysis prior to implementing rules and enforcement actions provides significant value to consumers. It also helps limit “regulators’ remorse” at federal agencies.
The CFPB’s new direction is particularly warranted, given that some of its most high-profile regulations have lacked sufficient independent analysis in advance of implementation.
For example, the CFPB proposed a rule in 2017 banning mandatory arbitration clauses in financial products. Independent researchers examining the proposed rule found that consumers would receive smaller settlements under the CFPB’s new rule. Instead of embracing the economic research, the CFPB buried it in a footnote in its final rule, leaving a gaping hole in the rule’s methodology — a hole which could have been filled by a robust OCBA.
Inadequate economic justification also afflicted the CFPB’s 2017 rule on payday lending. By the CFPB’s own admission, the rule would have reduced lenders’ revenue by over 70 percent. Yet, the CFPB argued that only 7 to 11 percent of consumers would lose access to loans. No matter one’s feelings about payday loans, it’s hard to imagine how so few consumers would lose access to lenders facing such a dramatic reduction in revenue. More troubling, the CFPB’s justification for the rule rested heavily on the findings of one academic paper whose author disagreed with the CFPB’s interpretation of his findings.
In 2017, Congress nullified the CFPB’s arbitration rule through the Congressional Review Act, and in 2019, the CFPB proposed broad changes to their rule governing payday lending.
Although policymakers finally got it right, there was damage done in the meantime. Businesses spent countless hours and resources reading, interpreting and preparing for the arbitration and payday lending rules. Recent empirical evidence shows these costs are passed on to consumers.
Too often, these regulations fail to address – much less solve – real problems. When regulators make mistakes, consumers pay the price in unintended consequences. Taking the time to have trained professionals consider this balancing act is a warranted, non-partisan decision. With the new Task Force, ARC and OCBA, the CFPB has an opportunity to keep unintended consequences to a minimum.
Beau Brunson is director of policy and regulatory affairs at Consumers’ Research.