The CFPB has a lot of potential to educate consumers about products and force credit card companies, mortgage companies and the like to make their products more understandable. One of the many structural problems that led to the housing bust was that lots of people took out mortgages they did not understand. The initial low rates were advertised and emphasized well, but the increasingly high rates were buried in fine print after pages of legalese. When homeowners’ rates went up dramatically, they were both surprised and unable to make the payments. This (combined with the plummeting of the value of their homes) led in part to many foreclosures. This new agency is responsible for ensuring that borrowers understand the terms of their loans and that lenders are not able to provide confusing, deceitful forms.
The bureau is currently seeking comments on many forms that it is working to simplify. I have been perusing the site myself and find it user-friendly.
Another potential benefit is the consolidation of consumer financial regulation into one agency. Before the 2008 bust, rules and regulations covering consumer financial activity were spread over a variety of agencies and thus not particularly accountable to anyone. One of the main ideas behind the bureau is to consolidate power in one agency to make the regulations more effective.
Now for a few of the possible negatives.
The CPFB creates a special unit that is focused on protecting seniors. The bureau is able to compensate “victims” of financial fraud. Since this group tends to rely on fixed incomes and because seniors often are victimized, it seems like a good idea to provide special safeguards for older Americans.
However, as we well know from the Medicare and Social Security crises, providing seniors with special financial benefits is a ticking time bomb that will explode over and over again as the baby boomers hit 65. Although it is not an entitlement program, the idea that we are again singling out this group for possible financial benefit strikes me as extremely expensive.
The GOP argues that the bureau having only one director, who is appointed by the president and not accountable to Congress, consolidates too much power in one, unelected individual. Some other agencies are by law required to have directors from both political parties. Whether this is a real problem will depend on the director.
If, as Richard Cordray seems to be so far, the director is a competent and honest public servant, then having one person in charge is obviously the most efficient way to work. On the other hand, since the agency does have a wide reach, a corrupt or incompetent director would be a disaster. However, Congress has proven itself to be an incompetent and incapable of bipartisan compromise. We cannot assume that its oversight would benefit the agency.
The biggest potential problem with the agency is that it could have the unintended consequence of eventually driving up costs for consumers. This is a mixed bag. On the one hand, we simply must have stronger oversight of financial products and marketing so consumers are not again lulled into a maze of confusing debt. On the other hand, the cost to firms of defending themselves in investigations and complying with new rules will be passed along to their customers.
Theoretically, increased transparency of prices and services should make the market more efficient for all players. Only time will tell whether the CFPB will be able to effectually police financial services without punishing their customers.