Bureau of Consumer Protection Must Put Consumers First; Congress Should Reform the Reform before It Is Too Late

Article excerpt


As the effective date for the new Bureau of Con- sumer Financial Pro- tection approaches this summer, observers are expressing mounting concerns about its unprecedented power and lack of oversight. Newly empowered House Republicans have introduced several legislative proposals to trim the sails of the new agency, most notably House Financial Services Committee Chairman Spencer Bachus' proposal to change the bureau's single-director management structure to that of a five-member commission.

While those efforts are expected to fail in the Democratic-controlled Senate for now, there are several much-needed reforms Republicans could propose to further the bureau's consumer-protection mission while protecting consumers and small businesses from the unintended consequences of regulatory overreach by an unaccountable bureaucracy that would raise credit costs, restrict access to credit and do nothing to address the underlying problems of misaligned incentives that caused the financial crisis.

The bureau's structure itself may be unprecedented in American government: an independent agency within another independent agency. Although headquartered within the Federal Reserve, it remains largely unaccountable to oversight by the Federal Reserve Board or any other entity except through a cumbersome and limited oversight process by a council of regulators - which even then can act only if two-thirds of the council thinks a proposed action by the bureau would imperial the safety and soundness of the nation's financial system. Moreover, it is headed by a single chief appointed by the president rather than a multimember commission, leaving the agency's actions subject to the whims of a single individual.

As an unaccountable bureaucracy with a single head, the bureau will be susceptible to bureaucracy's worst pathologies: a tunnel-vision focus on the agency's regulatory mission, undue risk aversion and agency overreach. While a more coherent consumer-protection regime is needed, consumer-protection goals often can conflict with other goals, such as promoting competition, lower prices and expanded choice for consumers; and ensuring safety and soundness. For example, the law gives the bureau new authority to regulate slippery mortgage brokers. Although stricter regulations of mortgage brokers theoretically could reduce fraud (although there is no evidence that this is the case) brokers also provide a salutary competitive check on traditional bank lenders. Research by economists Morris Kleiner and Richard Todd finds that overly restrictive regulation that reduces the number of mortgage brokers in a given market results in higher prices and lower quality for consumers. An effective consumer-protection regulator must be able to balance consumer protection against other benefits to consumers and the economy of greater competition, lower prices, and enhanced safety and soundness. The current CFPB is not structured to weigh those broader trade-offs.

A better model is the Federal Trade Commission, the primary consumer-protection regulator for most of the American economy. At the FTC (where I was director of the Office of Policy Planning from 2003-04) the mission of the Bureau of Consumer Protection is virtually identical to that of the CFPB, focusing particularly on unfair and deceptive marketing. But the final decision on whether to act rests not with the director of the consumer-protection bureau, but with the five-member bipartisan commission to which the bureau reports. …