Balanced Regulatory Reform the Only Realistic Solution to CFPB Divisiveness
By Ari Karen
The recent combative hearings between House Financial Services Chairman Jeb Hensarling (R-Texas) and the director of the Consumer Financial Protection Bureau (CFPB), Richard Cordray, and Hensarling’s proposed changes to the Financial CHOICE Act underscore the deep philosophical divide that exists between the proponents and opponents of the CFPB.
While the sides continue to stake out and evaluate their positions in expectation of a battle over the director and the agency, it might be better for each camp to realize that given the sophistication and degree of integration of the mortgage and financial markets, the respective sides should (and do) have far more in common than they have differences. A dramatic win by either side, as opposed to a moderate compromise, could hurt both banks and consumers.
Both Democrats and Republicans have at various times agreed that the CFPB should be headed by a bipartisan panel. Sen. Elizabeth Warren (D-Mass.) – the original architect of the CFPB — initially envisioned the agency as headed by a panel as opposed to a single director. The concept of a single director was a change made by the Obama administration.
Last year, when the Republicans introduced the Financial Choice Act to amend Dodd Frank, it included a provision changing the CFPB’s leadership to a panel. Since that time, both Democrats and Republicans have changed their position, with each now wanting a single director, the difference being whether that director can be removed for cause or at the will of the president. While the latter issue will be decided by the D.C. Court of Appeals if no compromise is reached, the simple fact is that both Democrats and Republicans have seen the merits of panel leadership, a model applied at analogous agencies. Accordingly, one would think that it is an easy-to-reach compromise.
In other areas, however, there is a disconnect between the need for common ground and the reality that it exists. The fact is that balanced legislation is in the interests of both sides – even if they don’t realize it. An unbalanced “victory” creating a lopsided regulatory regimen will not benefit either side in the long run. For instance, from the perspective of consumer advocates, many aspects of the CFPB’s laws and regulations increase the costs to the consumer of applying for and obtaining a loan. Even consumer advocates have questioned the CFPB’s regulations at times.
Many of the regulatory protections literally wipe out loan products and reduce the ability of lenders to compete for consumers’ business. Still other regulations increase the difficulty of shopping for loans, making it harder to find a one-stop shop where a variety of products are offered, resulting in a scenario where consumers need to go to a number of different lenders and provide extensive documentation and jeopardize their credit score with multiple inquiries in order to find the best rate. For instance, the interpretation of certain laws pertaining to the compensation of loan officers literally makes these employees untouchable and unaccountable for even intentional errors that can prevent consumers from obtaining a loan. Obviously, these were not the intended consequences, yet regulatory burdens impacting lenders and consumers have created unwanted obstacles not contemplated when the laws were initially passed. Refining and streamlining these regulations is in the interests of consumers even if reforms would be more publicly welcomed by and seen as victories for banks, commonly considered opponents of the CFPB.
On the other hand, significant curtailment of regulations could have undesirable impacts adverse to the very industry participants seen as proponents of regulatory reform. Indeed, to the extent that the lifeblood of many lending institutions are the sale of loans, there needs to be an appetite for their purchase and transfer.
In many respects, the regulatory framework constructed after the financial crisis provided credibility that was necessary for those secondary markets to function. Cutting back the regulations too far raises the risk that fewer entities will participate in buying loans, leading to reduced liquidity, higher interest rates, and fewer mortgages.
Moreover, many regulations have been in place for several years at this point, and the implementation required institutions to incur tens (if not hundreds) of millions of dollars to comply. Hence, the costs of deconstructing these measures could far exceed the benefits, particularly when a partisan victory resulting in one-sided reform would likely beget a future equal and opposite response during the next swing of the political pendulum.
The reality is that the only solution — regardless of whether you sit on the “for” or “against” side of the fence — is moderate regulatory reform that maintains the integrity of the salient financial markets and simultaneously reduces overreaching regulation that impose substantial burdens on consumers and undermine their ability to shop for and obtain loans. Any one-sided victory for either side will be illusory at best, and lead to a slew of new and perhaps worse problems, requiring an entirely different set of subsequent reforms. The bottom line is that balanced reform is in the interests of all sides when they consider the long-term impact of regulations in this industry. Any imbalance may well hurt the very side that “wins” the upcoming debate.
Ari Karen, principal at law firm Offit Kurman.
Read the article on The Hill.