Co-authored by Larry Kirsch, Managing Director, IMR Health Economics
In the wake of the recent election, the mind-boggling possibility of a return to the pre-crisis world of 2008 is now a real threat. That is precisely what would happen if Congress and the incoming Administration forget why the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and what the Consumer Financial Protection Bureau (CFPB) has done in a few short years to restore sanity, market discipline, and fairness to consumer financial markets. In October, Trump told Fox News that “We have to get rid of Dodd-Frank.” Calls to do so have gotten louder since the November election. That ill-advised measure would trigger economic risks that must be avoided.
According to the Treasury Department the recent financial crisis resulted in $20 trillion in lost household wealth and 9 million lost jobs. In addition, ten million families lost their homes to foreclosure according to the free-market oriented National Center for Policy Analysis. And it is not an overstatement to say that the world’s financial system bordered on collapse.
Michael Barr, the Obama administration’s architect of Dodd-Frank, which created the CFPB, recently observed “The CFPB got what it needed from Dodd-Frank and worked well with it.” He was referring to the ability of Congress and the administration to work, collaboratively, to solve a problem of global importance: the collapse of the financial system and with it, the destruction of a vast proportion of people’s wealth and financial security.
Despite criticism from some that Wall Street was saved while Main Street was ignored, consumers have benefited from elimination of the most abusive practices and compensation for at least some of their losses. The CFPB can be credited for many of these gains. Promulgation of rules requiring lenders to verify borrowers’ ability to repay their loans, restitution of almost $12 billion to more than 27 million victimized borrowers, and other efforts to transform industry practice demonstrate that the CFPB has, indeed, “worked well.” To be sure, however, not everything the CFPB tried to accomplish worked out quite as well so there is clearly room for improvement.
In case studies for our forthcoming book on the CFPB’s first five years, we were able to probe some of the factors that led to success compared with others that presented a challenge. For example, the Bureau was able to enact and enforce rules, secure broad-based compliance with those rules, and transform business practices in the area of mortgage lending that it was not as able to do with indirect auto lending. Based on more than 50 interviews we conducted with current and former CFPB staffers, industry representatives, advocates, journalists, and congressional staffers, we suggest why.
In our research we found that some of the keys to successful consumer financial practice reform have included the following: 1) a motivated, capable, and pragmatic lending sector that is adaptive instead of ideologically inflexible; and 2) an information intensive and evidence based compliance system that is administered fairly, does not unduly straightjacket lenders, aims at clarifying and avoiding abusive practices, but also creates meaningful risks for non-compliers; and 3) scrupulous understanding regarding the limits of jurisdiction and reach.
By and large, mortgage lenders were motivated because it was obvious to political leaders, the general public, and to themselves, that mortgage lending practices were responsible for some of the worst aspects of the financial crisis of 2008. The industry suffered a severe loss of trust and reputation (as measured by Gallup and others) and needed to respond. There was no escaping that conclusion so instead of blaming the victims or cursing the reform initiatives altogether, the industry chose to respond by accepting responsibility, making financial amends, and working with the CFPB to reform its business practices. The industry had the capacity and sophistication to respond and sufficient technical expertise and money to accept CPFB compliance and enforcement requirements, and most did so. Adoption of ability-to-pay rules― as a substitute for illusory and abusive loan standards—called for lenders to verify borrowers’ ability to repay their loans based on solid information. Implementation was not always smooth, but such rules were put into force and gradually adapted. This was perhaps the most significant transformation in industry practice following the crisis.
Auto lending presented a very different scenario. First, auto dealers had obtained a legislative exemption from CFPB jurisdiction under Dodd-Frank and when the Bureau subsequently sought to supervise what it regarded as ostensibly discriminatory loan price mark-ups, dealers argued that the CFPB lacked a proper legal basis for its scrutiny. Dealers also rejected any charge of racialized price discrimination and offered a substantial technical challenge to the CFPB’s data, methodology, and analysis of disparate impact discrimination, Finally, auto dealers claimed “no harm, no foul”. Unlike the mortgage sector, dealers asserted that auto lending was not directly responsible for the financial crisis and that they had not suffered reputational damage severe enough to precipitate a response. Consequently, despite a handful of publicized cases, business practices in auto lending have not been transformed as was the case in mortgage lending.
Against extraordinary odds, the CFPB mounted a coherent and productive financial consumer protection project that pulled us back from the precipice of global financial ruin But its early achievements will continue to be put to the test as the Bureau matures, the original impulse for reform drifts further away as the recent crisis becomes a more distant memory, and political challenges mount. As Elizabeth Warren told us, “For me, the watchword is vigilance. Together, we must make sure the agency can do its job.”
Gregory D. Squires is a Professor of Sociology and Public Policy & Public Administration at George Washington University and Larry Kirsch is the managing partner of IMR Health Economics, Portland, OR.. They co-authored the forthcoming book Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward to be published by Praeger this March.