Could the CFPB stifle financial innovation?

Anyone who doubts the answer to this question is “yes” should take a look at this speech delivered by Director Richard Cordray before the Clearing House this past November.

He used the speech not only to criticize existing payment processes, but to admonish the assembled bankers that, as they develop a faster payments system, “it is essential that the interests of consumers remain at the top of your minds.” Then, apparently having channeled the needs of all consumers, he went on to list five principles that should be incorporated into any system that is truly consumer friendly. His five criteria were sensible enough; but reading the transcript still left a bad taste in my mouth.

I’m all for the CFPB monitoring the marketplace to make sure consumer products aren’t deceptive. Yet, when a Government official comes out with design specifications and inserts himself into what is essentially a product development process, he is taking things a bit too far. Could you imagine the uproar if the Secretary of Commerce gave a speech to Apple about how it should design the forthcoming Apple-Watch? Since when did Government know better than the marketplace what consumers want and how much those desires should be balanced against competing concerns like cost and efficiency.

CFPBphiles argue that bad consumer products are no different than bad toasters. They have no place in the marketplace. If only the CFPB had been around, they argue, it could have prevented the Mortgage Meltdown.

Really? The concept of consumer protection comes coupled with a dangerously naïve assumption that financial products can be classified as “good” or “bad.” But unlike a defective toaster, the same exact mortgage product – or electronic payment system for that matter – can be great for some members and lousy for others. A young couple with two steady and growing incomes might be a perfect candidate for an FHA mortgage loan with virtually no money down. A self-employed consultant who hasn’t had a steady income since being laid off five years ago probably isn’t. A recently divorced mom temporarily downsizing while she gets her feet on the ground might be a great candidate for a mortgage that adjusts after five years. Our hapless consultant? Probably not.

Does this mean that the CFPB has no role in regulating? Of course not. It’s vital that the marketplace communicate accurately and that businesses are held accountable for their mistakes. For example, by mandating that lenders be able to prove why they think borrowers have the ability to repay a mortgage loan, Congress and the CFPB established a framework for holding lenders accountable without denying them flexibility to treat members as individuals. Similarly, better disclosures, like clear contracts, are ultimately in everyone’s interest.

The line I don’t want to see crossed between monitoring and correcting mistakes as opposed to managing the development of financial products is impossible to define in statute. The best way to achieve this goal is by vesting the CFPB Director’s powers in an appointed Board. It would slow down the regulatory process and insure that one person can’t dominate the development and implementation of consumer products and services.

Imagine how much worse the Risk Based Capital reform proposal would be if Debbie Matz didn’t have to convince at least one other skeptical board member of its merits. Than ask yourself: Should one person, no matter how well intended, have the power to dictate the conditions under which every financial product and service will be offered to the public?

Henry Meier

Henry Meier

As General Counsel for the New York Credit Union Association, Henry is actively involved in all legislative, regulatory and legal issues impacting New York credit unions. Whether he’s joining ... Web: Details