The Consumer Financial Protection Bureau has released its report from the Taskforce on Federal Consumer Financial Law. The report consists of roughly 100 recommendations for improving consumer protections in the marketplace.
The members of the Taskforce presented highlights from its report at an online event on Jan. 4.
The event began with the Director of the CFPB, Kathy Kraninger, addressing the inspiration behind the Taskforce’s creation and the group’s goals.
“The Internet has transformed the financial industry, including its offering of products and services, as well as how it interacts with consumers it was high time for the Bureau to assess the impact of that dramatic evolution on Consumer Financial laws and regulations,” said Kraninger. “As government regulators, we need to ensure how we regulate and supervise the financial industry keeps up with technological advances accordingly we established the task force to identify regulatory gaps and identify regulations that need to be simplified and modernized.”
According to Kraninger, the report takes a holistic approach to the consumer finance regulatory framework with consumer’s interests at its core. The recommendations presented by the Taskforce include spurring innovation, increasing competition, expanding access to credit, empowering consumers, strengthening enforcement of the law.
The Taskforce’s recommendations are being made to the CFPB, Congress, and state and federal regulators.
Todd Zywicki, chairman of the Taskforce, continued where Director Kraninger left off by giving a comprehensive background of the buildup to the report and creating the report itself.
“[The report] is two-volume. The first volume reports are independent and consensus views on the current state of the consumer financial protection ecosystem… looking at the various institutional structures of the consumer financial protection system, including consumer protection law and policy information provision and disclosure competition, innovation, and inclusion,” said Zywicki. “The final section of the report looks at emergent issues and issues that are of a particular interest to particular populations such as young and younger and older consumers as well as financial education.”
Zywicki also identified the three overarching themes from the report: inclusion and access to the financial systems; a focus on financial harm as the centerpiece of the consumer financial protection system; and a focus on modernizing the consumer financial protection system.
Within these three themes, Zywicki noted the five goals that framed the Taskforce’s discussion. Those goals were, first, “the legal framework of consumer protection, second, a focus on consumer information and disclosure, third, the role of competition innovation in the financial system, fourth, the importance of financial inclusion at the heart of that system, and fifth the idea of regulatory modernization.”
Each member of the Taskforce was allowed to address an aspect of the report they found especially important. Dr. Thomas Durkin, a former Senior Economist at the Federal Reserve Board, began by highlighting the importance of the extensive research the reports provided and the findings related to credit available to consumers.
“One of the pieces of good news is that in the 21st century now there seems to be no longer any serious debate that credit is a good thing. Second, also closely related, is that availability of credit is even better and that ready access to absolutely to credit is absolutely imperative to modern life,” said Durkin.
Dr. J. Howard Beales III, Emeritus Professor of Strategic Management and Public Policy at the George Washington University, highlighted the central role of information in financial markets.
“Information is important to consumers for shopping to find the best financial product or service to fit their needs, but it’s also important to lenders for risk assessment to figure out who’s actually going to repay credit when it is granted,” said Beales.
Beales acknowledged the existence of imperfect information in the marketplace and the over-abundance of information that leads to diminishing returns in the market. Beales also noted that information is essential for lenders to reduce the number of marginalized consumers deemed bad risks.
“In particular, there’s some 45 million consumers that are credit invisible. They don’t have enough information in their credit file, or it’s too old to have a credit score, and as a result, they’re effectively not eligible for mainstream credit that always depends on having a credit score. Alternative data is a way to substantially reduce those numbers because payments on things other than loans like utility bills, or phone bills, or cable TV bills, or even the rent are also predictive of credit risk,” explained Beales.
Beales noted that privacy regulations could get in the way of alternative data. The Taskforce does not think that those regulations should stand in the way of access to credit because the benefits outweigh the risks. The Taskforce’s recommendation is to ensure a disclosure-based approach is not overused, reducing harm to consumers rather than allowing the disclosures to create further harm.
William MacLeod, partner at Kelley Drye & Warren LLP, and former Bureau Director at the U.S. Federal Trade Commission, focused his time on the closures of small banks and the impact that has on competition.
“Looking at the situation with small banks, they are slowly disappearing from the landscape. Today 122 counties in the United States have just one, 33 counties have no banking offices at all. This doesn’t bode well for the competition. If there’s no place to shop, there’s no shopping to protect, and if the only options of monopoly, there’s not going to be much incentive on the part of the provider to satisfy consumers consumer protections about improving choices,” explained MacLeod.
However, MacLeod noted that today fewer consumers are underbanked than ever before. This is a positive result of fintech companies and alternative financial services.
“One of our recommendations is that Congress should authorize the Bureau to issue licenses to non-depository institutions that provide lending, money transmission, payment services, and other services to consumers, so they have more choices. In the alternatives, Congress could allow OCC to issue such charters. We are also suggesting that Congress authorize the National Credit Union Administration to allow all credit union charter types to serve underserved areas,” said MacLeod.
MacLeod continued to explain that the Taskforce is “recommending a muscular CFPB, and to use its muscle to fight for competition and for consumers. It won’t be easy interest groups have stakes in the status quo, but consumers need a voice, and that voice needs to fight for competition, and we have a number of recommendations to do that.”
Finally, L. Jean Noonan addressed the need for regulatory modernization.
“Some of our laws and regulations may have made good sense at the time they were adopted, but rapid changes in technology have made their provisions, designed for a previous era, archaic in ways that complicate consumer transactions. In that way, they impose unnecessary costs on consumers and industry and convey no real benefit to consumers,” Noonan explained.
Noonan suggested that the laws become archaic when overly prescriptive and principles-based rules better serve consumers in the long-term.