Predatory lending still poses a systemic risk to the economy. Will Obama's new Consumer Financial Protection Bureau succeed in taming it, or will the agency be strangled in its crib?
If you want a hint as to where the battle of the 2012 general election might go, you could do worse than to look at where it started. On the morning of January 4, 2012, in his first official act of the campaign year, President Barack Obama mounted a podium in a packed high school gym outside Cleveland and rolled out an announcement. Blowing past months of GOP filibustering, he declared his recess appointment of Richard Cordray, a mild-mannered former Ohio attorney general, to serve as the first head of the Consumer Financial Protection Bureau, a powerful new regulatory agency created by the Dodd-Frank law. Back in Washington, GOP leaders, who had held Congress open in a pro-forma session during the Christmas break precisely to block such a recess appointment, went into fits of televised dudgeon, calling the move “arrogant,” “unconstitutional,” and—this from Mitt Romney himself—“Chicago-style politics at its worst.”
The consumer bureau has provoked virulent opposition from Republicans ever since it emerged as the brainchild of Elizabeth Warren, the Harvard law professor turned progressive folk hero who is now running for Ted Kennedy’s old Senate seat in Massachusetts. Though the GOP couldn’t stop the creation of the CFPB, it did manage to put enough pressure on Obama to make him shrink from nominating Warren to serve at its head, a decision for which he was promptly vilified by liberals. Then, when Obama nominated Cordray, Republicans held the appointment hostage, demanding structural changes to the bureau that would have made it more accountable to congressional committees and the industries that comfortably influence them. Most recently, in May, Glenn Hubbard, a top economic adviser to the Romney campaign, suggested to the Wall Street Journal that defanging the bureau would be a central agenda item in Romney’s economic strategy.
This GOP fury might seem strange, even self-destructive, from afar. After all, the prime mission of the CFPB, which is still just barely up and running, is to crack down on predatory lending—a range of practices epitomized by the sale of the exploding subprime mortgages that hollowed out much of the wealth of America’s middle class and precipitated the Great Recession. Polls show that, though few Americans are yet aware of the CFPB, an overwhelming majority support it once they learn about its mission of protecting consumers from big financial institutions.
Nevertheless, the now-bailed-out financial sector claims that if a strong regulator scrutinizes the safety of its products—as the federal government does with toys, cars, appliances, airlines, food, drugs, and most everything else that’s for sale in our capitalist economy—it will tank the industry. And so it has gone to war.
Obama’s rather nervy decision to begin 2012 by appointing Cordray suggests that he is prepared to make the CFPB an issue in the campaign—as well he should. We might as well just say it: saving the CFPB is essential to fixing the fundamentals of our economy and even restoring the American Dream. Americans need a strong financial sector, but not, as we now know from painful experience, one that profits by methodically stripping its customers of their assets. Predatory lending has become endemic to the business model of American finance, and until that changes, it’s hard to see how the economy can once again provide broad prosperity. Not even the financial services industry itself will prosper in the long run unless it adopts a business model that helps build, rather than erode, the wealth of average Americans. The question is whether the bureau can survive the Republican onslaught, and, if so, whether this “twenty-first-century agency” will be powerful enough to change the way our consumer finance market behaves.
The origins of the CFPB trace back, as many things do, to a conversion experience. In the early 1980s, Elizabeth Warren was a young conservative law professor in Texas who had set out to study why families filed for bankruptcy. The laws governing bankruptcy had recently been liberalized, and Warren had a dim view of the likely consequences. “I was going to expose these people who were taking advantage of the rest of us,” she recalled in a 2007 interview. “I set out to prove they were all a bunch of cheaters.” But her data came back telling a vastly different story.
American families weren’t going broke from shopping sprees at the mall, Warren found. They were going broke because their incomes were stagnating while their fixed costs—health care, housing, car payments—continued to rise. The struggle for these necessities was driving families to rely on a set of financial products that were increasingly mystifying to them and profitable for issuers: credit cards, home equity loans, payday loans, and the like. Once a family’s assets were depleted, bankruptcy was often just an illness, a job loss, or an exploding interest rate away.
The way Warren tells the story, she first had the idea for the consumer bureau years later, in 2007, at a time when she was having a lot of meetings with credit card executives. She was trying to sell them on the idea of offering what she called a “clean card”—a credit card that listed all its costs, its fees, and its true, long-run interest rate up front. (That is: instead of selling a card with, say, a 4.9 percent teaser rate and then jacking it up to 18.9 percent after some months, companies would just market a card with a straightforward 7.9 percent rate.) The card would then be granted a kind of Good Housekeeping seal of approval.
But the credit card executives all took a pass. At one meeting, an executive confided in Warren. “If we had to tell people what these things cost while our competitors play the same old games, no one would use our product,” he told her, as she recalled in a speech in 2011. There was no advantage for anyone in the business to be the first mover, she realized; the government had to get involved and set rules across the entire market. It was around that time, she says, that she began sketching out the idea for what would become the CFPB.
Warren’s wasn’t the only conversion experience that ultimately led to the CFPB. In the mid-2000s, Richard Cordray was serving as the treasurer of Franklin County, Ohio. An Oxford and Chicago-educated lawyer with several arguments before the U.S. Supreme Court under his belt, Cordray had made a failed, quixotic bid for the U.S. Senate in 2000 before adjusting his sights on local office. His campaign in Franklin County had rested largely on a promise to aggressively collect delinquent property taxes. Much like Warren, he expected to take on the shirkers who were taking advantage of the rest of us. But what he found was something else.
“There were deadbeats,” he grants. But a huge number of delinquent Ohioans were ordinary middle-class folk who had simply hit road bumps—medical problems, divorce, a death in the family, job loss—but had no shock absorbers, no savings, to help them bounce back. And so they had stopped paying their mortgages and, with them, their property tax bills. Cordray’s office also began to detect that a larger story was playing out: Ohio, it turned out, had been one of the first hotspots of subprime lending, and, by the mid-2000s, evidence of rampant speculation and mass delinquency was surfacing fast. “We began to see the irregularities that eventually became known as the foreclosure crisis,” Cordray recalls.
While essentially serving as a popularly elected collection agent, Cordray increasingly pivoted toward another mission: trying desperately to keep Ohioans in their homes. In 2006, Cordray was elected state treasurer, and continued in much the same vein. The problem was that other entities to whom homeowners owed money—the mortgage servicing companies that were in charge of managing people’s loans, for instance—were far less interested in problem solving and working with Ohioans than he was. In fact, they were ruthless. And so, in a 2008 special election, Cordray ran for the office of state attorney general. His platform this time: holding Wall Street accountable.
A lanky former basketball player with sandy blond hair, Cordray exudes a slow-moving midwestern gentleness—he wears Gold Toe socks around the office—combined with a cool cerebral intensity; he comes off like an odd cross between Mr. Rogers and Eliot Ness. In the aftermath of the financial crisis, he aggressively won billions in settlements for Ohio from firms like Merrill Lynch and AIG, epitomizing a class of state attorneys general who fought to bring Wall Street to justice at a time when the federal government was doing little more than trying to stabilize it. “We see what Washington doesn’t: the houses lying vacant, the eyesore stripped for copper piping with mattresses out back,” he told the New York Times during his tenure as Ohio’s top lawman in 2010. “We bailed out irresponsible banks, but we forgot about everyone else.”
Still, because of a legal regime called regulatory preemption—a rule that allowed federal regulators to keep state attorneys general from taking action against federally chartered financial institutions—Cordray was constantly frustrated by what he couldn’t do. “I could not sue any nationally chartered bank,” he recalls. “We were kind of picking around the edges of the problem.” In 2010, Cordray lost his seat to the popular ex-senator Mike DeWine. A mere three days later he got a phone call from Elizabeth Warren, who was putting together the founding team of the Consumer Financial Protection Bureau, wanting to know whether he might be interested in coming to Washington.
When Obama finally appointed Cordray to lead the bureau this past January, it had the effect of legally imbuing the bureau with all of its powers, and all of its responsibilities, under the law. For Cordray, the event entailed sitting quietly on a stool next to the president in a crowded gym for a few minutes and then spending the next several months in a dead sprint. “It was like being shot out on a rocket,” recalls Peggy Twohig, the bureau’s head of nonbank supervision (a role, by the way, that has never existed in the history of U.S. government or finance).
The many deadlines that the bureau is required to meet under Dodd-Frank have held its staff to a grinding pace. Thus far, the CFPB has issued proposed rules for mortgage servicers, proposed to bring large debt collectors and credit reporting agencies under federal supervision for the first time ever, and launched an inquiry into overdraft fees, among many other things. In terms of sheer man-hours, it has spent the largest share of its time writing extensive new rules for the mortgage sector—the largest consumer finance market in the world.
Along the way, the bureau has done what any go-getter does while new on the job: try to make itself seem indispensable. Whenever possible, the bureau has made its announcements, kickoffs, and speeches in places other than Washington. On the day I met him, Cordray had just returned from Nashville and was on his way to Indianapolis, luggage in hand. In late January, barely two weeks into the job, he had flown to Birmingham, Alabama, to hold a field hearing about payday loans. The event was scheduled to take place in a small room in the city’s civil rights museum, but as the RSVPs piled up, it had to be moved—first to a different room, and then a few blocks away to a space in the Birmingham convention center. Even there, fire marshals eventually had to turn people away at the door.
If there is a rule—as it sometimes seems there must be— that the noble purpose of a D.C. institution is proportional to the drabness of its offices, then the early incarnations of the CFPB were awfully noble. For the first stretch of its existence, the bureau was housed in a few floors of rented space in a reddish granite-faced building near Farragut North. The interior was a scene of scuffed carpet, boxes lying about, fluorescent light, and décor the palette of seasickness: greenish pale gray and bruised purple.
Into this vessel, an unusually young, bright-eyed, and idealistic corps of civil servants crammed itself steadily over the course of 2011. The staff grew from a handful to hundreds in a matter of months. Bullpens sprang up in any room much larger than a closet; at one point, there were senior economists working at card tables in the bureau’s heavily cannibalized main conference room.
In part because of its wonky but swashbuckling mission, and in part because of its association with Elizabeth Warren, the bureau has attracted an unusual mix of talent for the civil service. “I’m not someone who ever thought I would work for the government,” says Audrey Chen, a New York information designer whose previous employers included several tech start-ups and Comedy Central. The bureau’s part-time assistant director of research is Sendhil Mullainathan, a MacArthur “genius” grant recipient, Harvard professor, and star of the emerging field of behavioral economics. And numerous other recruits came from high-powered consulting firms or data-intensive advocacy groups like the Sunlight Foundation or Pew, giving the bureau a high-nerdy, service-minded feel: like a McKinsey and Company for the 99 percent.
One of the chief custodians of this heady culture is a man named Rajeev V. Date (pronounced Da-tay), one of the bureau’s first hires and now Cordray’s deputy. He has played an outsized role in recruiting staff and setting the bureau’s high-minded tone—which is interesting, given that Date’s background is not primarily in academia or advocacy, but in the financial industry. A boyish-looking lawyer trained in applied mathematics, Date is a former vice president at Capital One Financial, the wildly profitable Virginia credit card company that pioneered the use of “big data”—that is, analyzing mountains of transaction records to predict and then goose profitable consumer behavior—in financial marketing.
Date’s route to the CFPB began one day in the summer of 2006, when, in the course of researching some financial institutions that Capital One had recently acquired, he gave himself a crash course on the basics of the mortgage market of the time. And the basics were horrifying. “I flipped out. I completely flipped out,” he recalls. “The entire market was making fanciful credit decisions.” Date became so convinced that American finance was on the verge of collapse that he quit his job and sold his house. But rather than run for the hills, he went to work for Deutsche Bank on Wall Street—expressly to help banks raise capital as a buffer against the coming calamity. Then, after being paid well to raise those alarms, he left finance and turned full time to advocating for reform.
When I first met Date, he was sitting in his office at the bureau—a bare room little bigger than a supply closet, with a single small window looking out on the brick wall of an adjacent building. With a sheepish grin, he handed me a piece of gum, apologizing that he had nothing else to offer. He had taken a 95 percent pay cut from his last paying job, but he brimmed with the pride of an institution builder. “I’ve got little toddlers, so I’m very attentive to the fact that toddlers learn bad habits very quickly, and they learn good habits very quickly. The same thing is true with institutions,” he said. “We have tried to be intentional about baking in good habits.” (One policy Date carried over from Capital One is a rule that all executives must spend some time every month manning the consumer help lines.)
But, of course, the start-up phase of any institution’s life cycle—when major decisions are made in hallways, aspirations are grand and abstract, and the boss sits in a glorified closet—is an ephemeral thing. Already, the consumer bureau has had to choose its battles, raising the ire of consumer advocates recently, for example, by allowing credit card companies to exploit a loophole in the CARD Act by charging large signup fees. And it remains to be seen how the bureau will strike what is likely to be a tricky balance between its two most important mandates—to protect consumers and, at the same time, foster access to financial services. If the bureau focuses exclusively on protecting consumers by cracking down on abusive products, it could limit access to credit; if it focuses too much on expanding access, it could just give cover for driving more Americans into debt and the arms of a powerful financial sector. And it will doubtless be lobbied heavily in both directions.
So the question is: Over the long run (assuming the CFPB has a long run), why should we believe that the bureau will succeed in protecting consumers where other regulators have failed? Why, in other words, is it any less likely to become captive to the interests of the complex, powerful, and deep-pocketed industry it regulates?
This spring, the CFPB began moving out of its rented start-up digs and into its permanent headquarters—an address whose pedigree is enough to cause a shudder among those who know the recent history of financial regulation. The bureau’s employees now come to work at a high-Brutalist concrete and glass structure just a block from the White House, at the intersection of 17th and G streets, a building that, before the crash, served as the headquarters of the now-defunct Office of Thrift Supervision—former regulator to the subprime giants Washington Mutual and Countrywide.
The OTS, in its day, had jurisdiction over federally chartered savings-and-loan associations, or thrifts, and derived its funding from a system of fees: basically, any institution that was regulated by the agency paid dues to the agency. After a period of aggressive oversight in the early 1990s, bureaucrats at the OTS began to realize that they were eating away at their own revenue by closing runaway thrifts. And so, over time, the agency came to rely on a rather different strategy: hustling for new business. The OTS sent its agents out to the highways, byways, and boardrooms of America, trying to convince banks and other financial entities to change their charters and become thrifts, on the promise that the OTS would regulate them with a lighter hand than other federal agencies. This practice, and the consequent ability of firms to shop for the most congenial overseer, is known as “regulatory arbitrage.”
Experts often describe the run-up to the financial crisis as a “race to the bottom.” In reality it was a veritable track-and-field meet of such contests: some of them played out in the marketplace, others inside the government. Out in the financial marketplace, in the 2000s, opaquely marketed subprime products pioneered by unregulated, fly-by-night, nonbank mortgage lenders began to take off in the mainstream. Much as in the credit card business—where the boldly marketed 4.9 percent teaser rate masks the 18.9 percent rate that will eventually kick in—these were often mortgages that masked exploding costs down the line. Banks and thrifts, in order to hold their own, had to jump in with similar products, lest their plain-Jane fixed-rate mortgages look expensive by comparison. In market after market, hiding the true costs and risks of a product became a requirement for survival. And as lenders began to compete with each other on lack of transparency, regulators competed on laxity of oversight. The rest, as they say, is history.
Years later, when it was announced that the CFPB would take over the retired OTS building, some bureau staffers joked about holding an exorcism. In a sense, that’s just what the architects of the CFPB set out to do in designing the bureau’s institutional structure. “The bureau,” says the Harvard political scientist Daniel Carpenter, “is probably the first modern agency designed from the ground up with an eye to preventing regulatory capture and preserving autonomy.”
For example, the bureau’s jurisdiction covers the entire waterfront of consumer financial products and transactions—whether they involve banks, thrifts, payday loan shops, nonbank mortgage lenders, credit unions, debt collectors, student lenders, credit reporting services like Equifax, or something else. By regulating a sweeping array of institutions that have divergent, even fiercely competing interests, the bureau ensures that its interests are less likely to line up with any one segment of the industry. “They’d have to be captured by the entire financial system,” says Ed Mierzwinski, the consumer program director at the Public Interest Research Group. “Those guys will play against each other.” This commanding view of the market should also allow the bureau to level the playing field, taking away the advantages that once flowed to unregulated institutions—the nonbank players that served as nurseries for the predatory practices that eventually swept the market.
The CFPB is also designed so that, rather than receive its funding through a system of regulatory fees, it survives on a dedicated stream of money from the Federal Reserve. That means it relies on neither industry nor Congress for its supper. This is hugely important. Consider the case of the Commodity Futures Trading Commission, which was given huge new responsibilities under Dodd-Frank to set up so-called derivatives exchanges, a technically complex feat demanding substantial new manpower, technology, and money. The CFTC receives its funding through congressional appropriations, however. And Congress—perhaps in a spirit of austerity, or perhaps because Republicans have simply been looking for quiet ways to sink a knife into Dodd-Frank’s back all along—has more or less flat-lined the agency’s budget. As a result, the CFTC has missed scads of deadlines along the way to fulfilling its new obligations.
Unlike other financial regulators, the CFPB’s prime mission is to ensure the safety and soundness of financial products for consumers, not to ensure the safety and soundness of financial institutions. Under the old regime, regulating financial markets with an eye to consumer protection ranked low on several agencies’ lists of priorities. “Orphan mission” and “bastard stepchild” were terms I heard a few times in my reporting. At times, regulators even justified industry behavior that was widely considered to be predatory by saying such practices were necessary to keep these institutions solvent, which was the main regulatory concern. The bureau has no such built-in conflict of interest. (The CFPB’s decisions are subject to something called the Financial Stability Oversight Council, and may be overturned if they are seen to pose a risk to the financial system.)
Finally, the CFPB has a uniquely broad range of tools and powers at its disposal. It has the power to conduct onsite supervision of big banks and nonbanks, write and enforce rules, collect and track consumer complaints, and conduct original research on markets. And under its mandate to “facilitate access and innovation,” the CFPB’s remit includes running public financial education campaigns and could conceivably stretch, some experts say, to facilitating randomized trials of financial products to help create ones that aren’t predatory.
Indeed, the most innovative, interesting, and potentially powerful work of the bureau has to do with fixing the signals that move markets and drive consumer behavior. Until now, consumer financial protection in America has basically involved forcing lenders to disclose their onerous terms in what you and I know as the “fine print.” Under this regime, financial institutions were legally in the clear as long as the backdoor fee, the interest rate hike, or the obscure charge was noted somewhere in a product’s thirty-page contract. The idea was that somehow, because humans are rationally optimizing creatures, these important but buried signals were clear enough to guide the market to its best outcome for everyone.
Meanwhile, companies actually market their products based on a scientific understanding of how we humans actually behave. They highlight a few carefully chosen facts about a product, and hold them out as the most salient ones, knowing that these will be the signals that truly move the market. And these signals aren’t selected using mere guesswork; they are usually based on an empirically robust understanding of the way large populations of people have behaved in the past, and how they are likely to respond to certain stimuli in the future.
Credit cards, in particular, are like the fruit flies of finance: they generate reams of data about consumer behavior week in and week out. “You can run all kinds of tests all the time,” says Raj Date, referring back to his time at Capital One. Credit card issuers know, for instance, that lowering a customer’s minimum required monthly payment can make him into a more profitable user, because people then tend to carry a larger balance. Issuers also know that, simply by increasing a customer’s credit line—from, say, $2,000 to $20,000—there is a decent chance the customer will go from someone who reliably pays off his balance to one who will fall behind, and thus, again, become more profitable. “There are ways to model what are the attributes of somebody for whom that’s going to be true, versus not,” Date says, “and frankly, that’s more science than art. And it’s that kind of insight that has been almost exclusively the domain of issuers and not at all that of consumers.”
Probably one of the best ways to understand the consumer bureau is to think of its job as rectifying that imbalance. “I almost think about it as democratizing the value of data,” Date says. Ever since the bureau opened a year ago, it has been running experiments on new forms of disclosure—one- or two-page documents rather than novellas of fine print—under a program called “Know Before You Owe.” By posting model disclosure forms online, tweaking them over time, and eliciting feedback from tens of thousands of consumers, the bureau has begun gathering its own data on how people actually process different contract information. Similarly, it has also begun datamining the customer complaints about financial products that it collects.
But that’s just the beginning. The bureau’s research department—which will be made up not only of economists, but also psychologists and marketing experts—is only just getting off the ground, but could one day have the capacity to oversee large-scale randomized trials. At the same time, the bureau is also amassing huge amounts of industry data. Soon, it will have access to account-level information from nine of the largest credit card issuers—a far larger database, in other words, than what any individual issuer has on its own.
So what will the bureau do with all this information? In much the same way that companies use all their data to figure out exactly how best to profit from their customers, the bureau will use data to decide exactly how best to hold the market to the standards outlined in Dodd-Frank—how to keep it fair, transparent, and competitive; how to make sure that it is not abusive or deceptive; and how to make sure it supplies consumers with information that is timely and understandable.
It’s still too early to say exactly how the bureau will intervene, but much of the early rhetoric surrounding the agency points to the idea of requiring a radically simplified form of disclosure—one that essentially merges a product’s marketing pitch with its fine print. Across a given market of products, for example, the bureau could mandate a standard one- or two-page contract written in plain English, with required fields and consistent framing.
In a world where plenty of people still want to see bankers sent to jail, this might not sound like regulation with a full set of teeth. But simple disclosure, if it forces companies to market products on their true costs—including the stuff that has traditionally been buried on page 19 of a contract—could have a hugely powerful effect in reshaping markets and even upending business models. Companies would suddenly have to compete with each other on value to the consumer, rather than on how to most cleverly hide the ball. (For complicated contracts like a mortgage, which may not be reducible to a couple of pages, the behavioral economist Richard Thaler recommends using online “choice engines”—tools not unlike Kayak.com or Expedia, which can rank and compare products even when they involve a complicated set of variables and parameters.)
But undoubtedly, in some cases the bureau’s research will lead it to the conclusion that disclosure is not enough. For example: after the crash, mortgage brokers came under fire for taking special kickbacks called “yield-spread premiums” in return for guiding borrowers to loans with a higher interest rate but lower up-front costs—loans, in other words, that were more profitable for lenders. When the Federal Reserve performed some empirical tests to see whether the problem could be tackled with disclosure, the results were unexpectedly fascinating. When brokers were required to disclose how much money they were getting out of a yield-spread premium, the Fed found that consumers simply didn’t understand what they were being told. And in a different test, when brokers were required simply to explain in the abstract that they were working in their own interest and not the borrower’s, something strange and utterly human happened: borrowers trusted them more for being honest, still without really understanding what was going on. And so the Fed decided that disclosure was not going to work. It banned the yield-spread premium altogether. Down the road, the consumer bureau is bound to make similar calls of its own; as the financial industry surely knows, given their full-court war on the CFPB, some of their practices are not long for this world.
The other day, I was taking an early-morning walk around my neighborhood when I saw a sheaf of papers scattered across the street and a nearby yard. The cover page was lying faceup on the crosswalk. It was a notice of foreclosure. The address listed on the paper referred to a house a little way down the street, one much like mine: toys and plastic sleds in the yard, a slightly overgrown garden.
A person in today’s economy doesn’t have to look hard to see that, four years after the 2008 crisis, the American household balance sheet has made a modest recovery at best. After reaching the highest average debt-to-income ratio since 1929, families have been slowly “deleveraging” ever since. Between 2007 and 2009, the typical American household lost a fifth of its wealth. Nearly half of Americans say they would have a hard time coming up with $2,000 in thirty days if a financial emergency arose. And in some states, foreclosures are back on the rise.
Another way in which the crisis lingers is in the deep distrust many Americans still feel toward the finance industry. Last year, around the time a Los Angeles artist was making a killing on eBay selling oil paintings that depicted suburban Chase Bank outlets on fire, an online activist in Southern California was organizing a mass protest called Bank Transfer Day—encouraging people across the country to close their bank accounts en masse and switch over to nonprofit credit unions. (On the appointed date, some 40,000 people reportedly joined credit unions.) According to a recent survey by the Corporate Executive Board, only one in five North Americans has confidence that their financial institution will keep its promises and commitments. Globally, the same report finds, this lack of trust in financial institutions results in some sixty-three million unsold products every year.
The banks, for their part, seem stuck in an embattled and defensive crouch. At an annual meeting of the American Bankers Association in Washington this year, the audience gave a cool if not overtly hostile reception to a representative of the CFPB, offering applause on a five-second delay. The small bankers I spoke to there felt that they were being unfairly blamed for problems that started in unregulated pockets of the financial market; but at the same time, they simply didn’t believe that the consumer bureau would be capable of leveling the regulatory playing field. The mood was one of closed ranks; the bankers repeatedly referred to themselves as “the indispensable industry” and proffered the slogan “To denigrate one is to denigrate all”—which is, bizarrely, only a slight variation on a saying most closely associated with the Wobblies.
All this comes at a time, ironically, when Americans need financial services—the boring, help-you-plan-for-tomorrow kind—more than ever. “People need a place to safely store their money, they need a way to make payments, they need a way to save, and they need access to credit,” said Jennifer Tescher, the president and CEO of the Center for Financial Services Innovation, in a recent speech. “Financial services aren’t going to provide more income, or a job, or health care. But they provide structure and stability, and without that all those other things are hard to achieve.”
Some bankers, at least, are starting to see the upside of the CFPB. Sallie Krawcheck, the former president of Bank of America Wealth Management and the former chief financial officer at Citigroup, wrote an op-ed for Politico in April arguing that the bureau would ultimately expand and strengthen the market for financial services. Most banks, she wrote, owe far too much of their revenue to plain customer inertia. Financial products, with their umpteen-page contracts, are so opaque that consumers don’t really know what they’re getting—or what they would gain from switching to someone else’s product. And so they stick around, confused, frustrated, and dependent. The supposedly hyper-innovative financial industry is actually, when it comes to customer service, a sucking bog.
If the CFPB instituted a world of simple, one- or two-page contracts for all competitors in a market, Krawcheck writes, the immediate result would be a bunch of customer churn. This would “strip banks of the significant earnings they derive from customer inertia—including earnings from deposits on which they pay below-market interest rates,” she writes. But it would also, in the next beat, introduce a jolt of competition and innovation to the market, as providers scrambled to find more clear ways to benefit consumers. And who knows? Perhaps one day banks and thrifts could compete to use the insights of behavioral economics to get people to actually save money.
The only problem is that, in all likelihood, such a world would be one where banks only get more sophisticated, powerful, and centralized. And herein lies the main philosophical shadow lurking over the bureau. By setting out to match the analytical prowess of the financial industry, the CFPB is implicitly giving its assent to a world where finance is governed by complicated models, big data, and the statistical masters of the universe who command them—as opposed to an older world where finance was governed by the personal relationship between a borrower and a lender. It’s just that now the public has a few statistical masters of the universe on its side. “The hubris of finance is now being matched by the hubris of the regulator,” says Amar Bhidé, an economist at Tufts University. “Wonderful.” Throughout the debate over financial reform—and for much longer than that, really—there have been people who believe we should craft sophisticated regulations tailored to the heavily engineered financial system we have; and then there have been those who believe we need to break up that system, shatter the behemoths into smaller pieces, and bring finance back down to human scale. The CFPB does little to satisfy those in the second camp.
That said, for as long as that system exists, the CFPB is our best hope. For the past generation, financial institutions have gotten a few things—burying revenue streams, extracting wealth, and juking consumer behavior—down to a science. Now, assuming the bureau survives and can fulfill its mission, the most important question facing them will be whether they can figure out profitable ways of helping Americans build wealth. This also happens to be one of the most important questions facing the rest of us as well.
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