Paul Volcker, the former chairman of the Federal Reserve, once quipped that the ATM was “the only useful innovation in banking for the past 20 years.” Today’s regulators, especially ones taken with the new fintech industry, would do well to remember that new doesn’t necessarily mean better for most people.
In the name of innovation, the Consumer Financial Protection Bureau now wants to exempt companies from the most basic rule of any functioning marketplace: transparency. The agency, created eight years ago to do what its name suggests, but now under the thumb of a Trump administration ideologue opposed to that mission, is concocting rules that would allow companies to muddy or dispense with basic consumer disclosures, hiding behind the banner of “innovation.”
Volcker’s 2009 zinger was a dark one. At the time, the country faced an economic catastrophe. The American economy was hemorrhaging jobs. Millions were waking up to find out that their homes were worth far less than they paid for them, that they faced foreclosure or that their retirement savings had vanished. What had caused this crisis? Consider the role of “financial innovation.”
The engineering of mortgages into byzantine securities turbocharged the 2008 financial crisis. Regulators could have taken a firm stand against the fraud that was built into many of these business practices. They did not. They could have protected homeowners better. They did not. And when the system broke down, bankers and regulators did not pay the price; the public did. Innovation can simply be a code word for putting ordinary people and the financial system at risk, with no upside except for short-term profits for the few.
The CFPB, the agency specifically created to stand up for ordinary people, wants to create a “regulatory sandbox” for consumer disclosures — a dangerously broad exemption from basic disclosure rules that let consumers know what they’re buying. By painting this as a boost to financial technology startups, the CFPB is trying to bask in the reflected glory of Silicon Valley. But that’s pure PR. In truth, the new loopholes apply to any financial company.
How much does a loan really cost? How does the company decide on the pricing, or determine if a client is creditworthy? Under the current CFPB proposal, companies would have the CFPB’s full blessing to avoid legally required price tags that can be compared to other options. It’s billed as a way for companies to try out new ideas, but these trials could last a decade or longer and encompass large groups of firms.
Companies ought to be finding innovative ways to serve their clients, not cheat them. In any business, it’s easy to make money when you know more than the customer does. And when the product involves a loan, or a mortgage, a swindle could ruin their financial life. That’s why regulators are supposed to set uniform parameters that let consumers make more informed decisions. Smart regulation helps markets function.
Take it from the bureau’s intellectual godmother, Sen. Elizabeth Warren. Her explanation of the CFPB’s post-crisis framework for mortgage lenders is pretty simple: “You can compete, but you’ve got to be real clear about the things you're competing on. Things like: Information has to be put in the same place on each of the forms, so people can lay the forms down next to each other and see what’s there and you don’t get to put it back on page 32 in fine print.” Put another way, Warren notes: “Theft is not capitalism.”
But over the last year, Mick Mulvaney, the CFPB’s acting director, has consistently undermined the agency. He wants to dismantle the office dedicated to fighting racial discrimination in lending. He’s dropped cases against predatory payday lenders. He even rewrote the bureau’s mission statement to water down the focus on consumers. This regulator is focused on serving the industry, not the public.
Now, Mulvaney plans to turn a blind eye to potential consumer harm, with the excuse that these new companies promise innovation. Maybe, maybe not. But this proposal leaves it up to the companies to let the CFPB know when their own actions ought to be investigated. This proposal takes as its premise that it’s always good for finance to be doing something new, even if it’s a new way of hurting customers.
Regulators are notoriously bad at keeping up with the latest business innovations and the effect they have on consumers, but they don’t have to be. Policies like Mulvaney’s proposal, by simply factoring consumer protection out of the equation, keep regulators distant and in the dark until it’s too late. Regulators can spot danger when it’s approaching if they want to. But at the very least, they have to look at what’s coming.
