Consumer Financial Protection Bureau – the Birth of a Regulator

A few weeks ago, amidst much fanfare, the Consumer Financial Protection Bureau (CFPB) assumed some level of regulatory authority over, well, pretty much the entire financial sector of the U.S. economy.  The reaction from most of the media has been one of fawning delight, as evidenced by this column that appeared on WalletPop.com back in May and this column by Gail MarksJarvis that appeared in the Chicago Tribune.  Indeed, a simple Google search for “Consumer Financial Protection Bureau” returns almost 2 million hits and, if my random sampling of articles is statistically valid, roughly 70% of the Literati are convinced that sliced bread has found some competition in the “best things” category.

It is certainly true that many banks are indeed ‘scared’ – a fact that the media pundits gleefully celebrate, as though a regulatory entity striking fear into the heart of the institutions that are charged with financing our hopes and dreams somehow makes things better for consumers.  Sorry, Charlie, but that is simply not true, and for evidence of that, look no farther than the announcement made by MetLife last week that it would sell its banking business to avoid CFPB regulation.  Lest you believe this is some sort of isolated incident, MetLife is joining its brethren insurers Hartford Financial Services Group and Allstate in divesting depository business. There are likely more firms to follow as the CFPB issues the expected myriad of new regulations necessary to implement other Dodd-Frank reforms over the next few months. 

Unfortunately for senior citizens, MetLife is currently one of the nation’s leading lenders in reverse mortgages – a product designed for the 62-and-older-crowd to help manage life expenses on a fixed income.  Most of the large “money center” banks have already shut down their reverse mortgage divisions, meaning that the result of MetLife’s announcement may be that funding for this necessary loan product becomes more difficult to find.  One must assume that limiting consumer choice for the elderly was NOT one of the goals of Dodd-Frank and, by extension, the CFPB. So let’s call this a real-world example of unintended consequences.

Here are some other possible unintended consequences arising out of the CFPB, as I see them:

• Traditional mortgage loans may become much more difficult to obtain as a result of the Qualified Residential Mortgage (QRM) being so restrictively defined as to exclude a large portion of the loans actually written in the last two years.  Loans with terms falling outside the QRM definition will be subject to risk-retention requirements that will lower banks’ tier-one capital ratios and increase their administrative and compliance costs, leading to questions as to whether they will be willing to make these loans at all.
• Mortgage, auto and consumer loan products may become more expensive for consumers as a result of restrictions that Dodd-Frank placed on debit card fees paid by retailers to banks.  Banks rely on these fees to pay for expansion and maintenance of their vast debit card networks and other overhead costs.  Restricting collection of such fees means that banks will have to compensate with increased fees and rates on their other products.
• Mortgage, auto and consumer loan products may become more expensive for consumers as a result of banks’ increased regulatory compliance expenses.  Compliance costs for companies in the financial sector, whether or not they are depository institutions, have skyrocketed over the past two years as regulators at both the federal and state levels have implemented a series of laws designed to curb lending practices that the marketplace had already largely eliminated on its own.  More regulations and the addition of a new regulator with new reporting and examination procedures will only add to these costs.

Please don’t misunderstand; I’m not saying that the CFPB is without its positives.  For example, it has already been working behind the scenes to create simplified mortgage forms designed to merge the confusing Good Faith Estimate and Truth-in-Lending disclosures into one easy-to-follow document.  Consumers and mortgage professionals alike have been clamoring for this for a long time, and I am encouraged by what the CFPB has designed.  I am also encouraged that they have actually made the effort to solicit (and listen to!) input from the mortgage industry in the design process, making it far less likely that the result of the process will be an unworkable document with compliance consequences that extend outside the document itself, like the last GFE revision was.

Bottom line – in my opinion, the CFPB should tread very lightly in promulgating new regulations.  In order to be successful, they need to keep in mind that protecting the consumer from “unfair, deceptive and abusive acts and practices” does NOT mean the same thing as preventing the consumer from making his or her own decisions for fear that they will end up being bad ones.  They also must be cognizant of the fact that, regardless of the portrait that the media paints, the financial sector was really NOT an “unregulated wildwest” before the Dodd-Frank legislation.  In many cases, stated goals can be accomplished with minor tweaks to existing regulations instead of sweeping new ones intended as punitive to the very financial institutions that the government is pressuring to increase lending and save the larger economy from another downturn.