More Counterproductive Progressivism: CFPB

A recurring theme here is the paradox that progressive policies supposedly designed to help the disadvantaged somehow end up making the intended beneficiaries worse off.  Thus, for example, we find that the jurisdictions that try hardest to decrease income inequality by collections of government handouts and welfare programs then end up with the highest measured income inequality in the country; that Obamacare, supposedly intended to make health insurance "affordable" for all, ends up with huge price increases, pricing lower-middle-income people out of the health insurance market; that dramatically increased minimum wages render many minority youth unemployable; and so forth.

This past week, I attended the Federalist Society conference in Washington, and was introduced to another dramatic instance of the same phenomenon that I had not previously appreciated.  This is the extent to which so-called "consumer protection" regulations, supposedly designed to protect lower-income and disadvantaged people against being taken advantage of by banks and other large financial institutions, instead actually harm the intended beneficiaries.  The harm takes the form of making bank accounts and credit (including credit cards) less available to such people.  Much of the harm has been done in very recent years by the Consumer Financial Protection Bureau, an entity newly-established in 2011 under the 2010 "Dodd-Frank" financial regulation law.

You will recognize the CFPB as being the personal baby of crusading progressive Massachusetts Senator Elizabeth Warren.  Here is a bio on her from Wikipedia.  Prior to her election as Senator in 2012, Warren used her perches as a professor at Harvard Law and as a top Congressional staffer to advocate for the creation of what became the CFPB, and she was influential in creating the highly unusual structure of the agency.  (That structure includes funding independent from Congressional appropriations via the Federal Reserve, and a sole administrator supposedly immune from firing by the President.  That last provision was declared unconstitutional by the D.C. Circuit in October.)  Immediately after passage of Dodd-Frank, Warren was appointed by President Obama as "Special Advisor" in setting up the agency.  Upon its creation, she then aggressively angled to get the non-firable position that she had designed; but it went to Richard Cordray instead.  So she ran for the Senatorship from Massachusetts, and the rest is history.  (Although Cordray's position was supposedly protected under the statute, now that that protection has been declared unconstitutional, it is widely expected that new President Trump will promptly demand his resignation after the inauguration.) 

So how have recent financial regulations supposedly designed to protect the disadvantaged fared in achieving their intended goal?  At the Federalist Society convention, a professor from George Mason University, Todd Zywicki, presented some extensive research on the subject.  The most important part of his presentation was derived from Senate testimony that he gave in April 2016, and that is available here in pdf form.  The takeaway:

The tragedy of Dodd-Frank and the CFPB is that it squandered this unprecedented opportunity to modernize the consumer credit system to promote competition, consumer choice, and innovation. Instead, the post-crisis regulatory framework has resulted in higher prices and reduced choice for consumers and little improvement in consumer financial protection. Indeed, by stifling competition and driving millions of Americans out of the mainstream financial system, it may actually result in more consumer protection problems. 

What about Dodd-Frank generally and CFPB in particular led to such results?  Zywicki's testimony contains a long list of statutory provisions and regulatory actions that in the aggregate have limited fees that institutions could charge, and raised their costs of compliance and dispute resolution, leaving them unable or unwilling to deal with low income or low credit score consumers.  Such actions and provisions have included: limiting "interchange fees" on debit card transactions (the so-called "Durbin amendment" of Dodd-Frank); limiting fees for things like overdrafts and credit lines; prohibiting arbitration and restrictions on class actions in dispute resolution; and aggressive discretionary enforcement by the CFPB, leading to many high-cost settlements by banks of dubious claims, without adjudication.  

Zywicki's research documents dramatic adverse effects of these actions and provisions on low-income consumers, on multiple fronts: decrease in availability of free checking accounts (which occurred almost immediately after the enactment of Dodd-Frank); decrease in the availability of credit cards to people with low credit scores; and decrease in the availability of mortgages to people of low income and/or low credit score.  For example, as to credit cards:

Consumers have also suffered a loss of access to credit cards in the post-crisis era, not only because of Dodd-Frank but also the impact of the Credit Card Accountability Responsibility and Disclosure Act—and once again, low-income consumers have suffered the most. According to the CFPB’s own estimates, the period between July 2008 and December 2012 saw the closure of 275 million credit card accounts and elimination of $1.7 trillion in credit card line of credit. Overall, the CFPB found a significant decline in the percentage of households that had cards, from 76 percent to 71 percent. But even this figure understates the disproportionate impact on low-income consumers. According to Federal Reserve Board economists Glenn Canner and Gregory Elliehausen, the percentage of households in the lowest quintile of credit scores with credit cards fell from 65 percent in 2008 to 54 percent in 2010.  Loss of access to credit cards has forced those consumers into great reliance on higher-cost products such as payday loans and overdraft protection. 

The bottom line in each instance that Zywicki analyzes is the same: when banks withdraw from a given market due to regulatory burden and hostility, the breach gets filled by much higher-cost and shadier operators like check cashing services, pay-day loan providers, pawnshops, and the like.  For the poor and low-income consumers, it all means less availability of bank accounts and credit, and at much higher cost.  Congratulations, Senator Warren!  You might think that Elizabeth Warren must be "smart," because, after all, she was a professor at Harvard Law School.  In fact, the entire great depth of her thinking consists of the idea that if the federal government orders something, then it will be so, without any adverse or unintended consequences.  And, when the adverse and unintended consequences inevitably emerge, she blames the evil bankers.  Is this the best that the Democratic Party can do?