A CFPA Research Brief

I want to point out this research brief on the Consumer Financial Protection Agency (pdf file) from Law Professor Adam Levitin. At 16 pages, it’s the best one-stop paper I’ve seen for understanding why CFPA needs to pass.

As opposed to specific practices, Levitin focuses on four key structural issues that are broken with our current system.

1. Consumer protection conflicts with, and is subordinated to, safety-and-soundness concerns.
2. Consumer protection is a so-called “orphan” mission.
3. No agency has developed an expertise in consumer protection in financial services.
4. Regulatory arbitrage of the current system fuels a regulatory race-to-the-bottom.

The first point is key and informs the rest of them. “Safety-and-soundness” means that regulators currently are focused on making sure the banking system is sound, part of which means that banks have lots of money. So if Americans are paying a mind-boggling $38.5 Billion dollars in overdraft fees a year (more than the GDP of Kenya, as a comparison) that just means regulators can sleep a little more soundly at the wheel.

If having giant banks dedicated to soaking and misleading consumers was creating a safer and more sound financial system, that would be one thing, though preliminary evidence says no:

Since protecting large banks at the expense of consumers is the current goal of the regulatory structure, other goals such as collecting data on actual experiences of consumers (something researchers have a difficult time finding, and have to use poor substitutes like aggregate consumption diaries), having in-depth knowledge locally on scene, and fighting regulatory arbitrage among the current 11 agencies that investigate this material fall by the wayside.

Levitin also brings up this point, mentioned again and again (and worth mentioning again): “Most consumer financial products differ in their class primarily on price, not functionality, but product pricing structure is designed to make comparison shopping difficult in order to avoid commoditization (and inevitably lower profit margins). Better disclosure should encourage commoditization and price competition, which should actually bring down prices.”

If you are in the business of reading or disseminating research papers, I’d recommend that Levitin paper. Though health care is rightfully focusing our minds and attentions these days, this is another piece of necessary reform that could get easily thrown under the bus.

24 thoughts on “A CFPA Research Brief

  1. I’ll buy “soaking” consumers, but “deceiving”? I thought fraud was already illegal…

    Like all thinking people, I support smashing the mega-banks into unrecognizably tiny pieces. But I am not sure about this CFPA thing.

    Is there any point at which individuals are responsible for their own actions? Or is that idea just too old-fashioned?

  2. Good point – I’ve switched “deceiving” to “misleading.” (can I do that? Just did…) I think if you look at stuff like Yield Spread Premiums it’s misleading in so much as it is much harder to compare cross contracts.

  3. Whoops.
    The 1970’s Consumer Protection Agency proposal, blocked by a Ford by a veto threat, was based on a watchdog function only, no regulatory powers for the agency.In theory to avoid being captured by special interests. This proposal by the Administration is excellent, but may be a bit broad.It will certtainly draw vigorous opposition from the banking community. Subpoena power and the right to intervene in administrative and court procedings, parens patriea…with standing, might be enough to do the job of correcting the current financial imbalance,

  4. I’m cross-posting this here so that it won’t get lost in the sands of blog time.

    Mike (Richard?)RortyBomb Konczal, is this you?


    Tale of two similar Konczal’s:

    There’s one that worked at KICU in San Francisco in 1992, then KPIX in 1998.

    There’s one that worked at the University of Southwestern Louisiana’s News Service in 1992 (and is now working at the PR company in the link above).

    Makes a lot more sense that SF newsman is the right one, but how do you go from newsman to “financial engineer”? Never heard of that trick before.

    Which one is the doppelganger?

  5. I am none of those Mike Konczal-s. My bio would be relatively boring; feel free to email me if you’d like to know more.

  6. Thanks. Will do.


    “If having giant banks dedicated to soaking and misleading consumers was creating a safer and more sound financial system, that would be one thing, though preliminary evidence says no…”

    This reminds me of the some recent discussion where they were talking about how much mob involvement in the construction industry adds to the overall cost of construction.

  7. I’m not sure what we are supposed to take from that chart. Big banks are among those with the highest losses, but are neither at the top nor the bottom? This presentation only seems suited to show they are big. We knew that.

  8. And thanks to your ilk preventing evolution from running its course, we allow people that can’t handle a credit card to procreate.

    Anyone that fell for that Cash for Gold commercial should be castrated.

  9. Are we forgetting that there are large numbers of people who only qualify for menial, less mentally demanding jobs (still very important) like maids, janitors, grocery baggers, some laborers and fast food workers and recent immigrants who just don’t have the capacity and/or the time to wade thru financial minutiae, much of which is overly complicated? But these individuals still have the need for credit for large purchases such as a car to get to work in, or maybe even a small house for their families? You think they could use a little help & protection from the rent seeking plutocrats who’ve been robbing us blind?

    Yes, the fat cats have been deceiving or trying to deceive a lot of our less gifted but very important workers. Seems you are disregarding these poor souls just like the multimillionaire & billionaire plutocrats are.

  10. The primary problem with the CFPA is its name. They should have called it Protect Wall St from Liars Loans Act or something; then Congress might be all for it. ;-)

  11. Ah yes, the “great unwashed”, too stupid to decide for themselves what to read and how to behave and what to think, so they need saintly geniuses like you to tell them. Under threat of force.

    Just one problem: Where will we find enough saintly geniuses to make everyone’s decisions for them?

    Seems to me the way to respect people is to treat them like adults. Which means helping them stay informed, prohibiting fraud, and otherwise letting them make their own decisions.

    Of course, some protections are appropriate; laws against usury are not exactly new. But I would prefer such protections in the form of well-defined laws rather than busybody regulators. I’m suspicious that way.

  12. “so they need saintly geniuses like you to tell them. Under threat of force.”

    Why the obnoxiousness? What that does that prove other than your apparent lack of concern or empathy for those among us who are relegated to menial jobs thru no fault of their own. Not everyone is lucky enough to be born with a high IQ. But thank goodness not everyone is born with hostility toward or a lack of understanding of those lesser endowed. You seem to care less about those among us who really need help & protection from predator financiers.

  13. I oppose the CFPA because it will be ineffectual and become captured as all other regulators become.

    I also believe the logic behind creating such a regulator is flawed. It goes something like this: we know the financial institutions are going to mislead you, rip you off, and nickle and dime you to death….the CFPA will be there to keep this status quo in check….so when they get really egregious….or you complain enough….we’ll slap their hands….and ratchet this activity back….until you get used to it, and that level becomes the status quo….then they push harder….and the cycle repeats itself….

    It’s all about transaction costs. What concerns me is the $38.5 Billion figure, and the 30-40% of GDP generated by financial services institutions. This is unsustainable.

    What I want is Capitalism with a level playing field.

  14. Hey, no one likes spending their free time with a magnifying glass trying to decipher poorly worded boilerplate legalese.

  15. For one thing, the “fine print” is almost deliberately confusing, even for the over-educated. Even if it were not, such fine print requires specialized expertise to understand.

    An analogy would be to ask the average frustrated contracts attorney to decipher a mathematical formula used to calculate fluid dynamics.

    Furthermore, even if he can read and understand the contract in its entirety, the consumer has little power to negotiate new terms. The card company says in essence: “Here’s the deal. Take it or leave it.”

    This means that the consumer then is left to choose the least unpalatable offer from other predatory card companies.

    I know the argument is that forcing issuers to provide credit on less onerous terms will reduce the availability of credit. But I don’t think that less credit such a bad thing; over-free credit is what got us into this mess.

    And if a business model needs to fleece its consumers in order to be viable, that does not sound like much of a business model.

    Finally, forcing the card issuers to curtail their activities will not mean that card issuance will disappear. People will continue to loan money for as long as there is money to be made from lending.

  16. I haven’t takent the time to read the paper yet, but suffice it to say that deceptive trade/market practices are as old as the cave man, and the current state of banking/credit dissemination has reached peak efficiency in the area of deception. If we can have regulation and regulators who severly limit such abusive practices, it’s all for the good. No matter how well drafted, the finance industry will probably (with its large entourage of expensive legal counsel) find ways to continue some practices. Regulators will need to be extremely diligent to overcome this problem. I have faith that this can be controlled, but the effort will have to be great. And, as a last note, too bad if it cripples ill-earned gains. There’s lots of opportunity to make money honestly, and maybe in part by cutting into the massive compensation packages offered to “attract the best” decievers. This is democracy functioning at its best, but protecting the citizens that it is supposed to work for.

  17. I thought this article was a fantastic introduction to the area and it left me wanting to read it again.

    The links between deregulation, the “race to the bottom”, increased “competitiveness” and purported “innovation” in financial instruments was wonderfully laid out. I was aware of the deregulation and increased banking activity in the early ’80s – but I mistakenly attributed this mainly to the crisis in third world banking and the quest for more stable borrowers.

    Prof Levitin’s article emphasizes the role of “disclosure”. There is no doubt about this need – But it also leaves one wondering about the role and nature of trust (which as any first year student learns is the foundation of all banking and trade). The descriptions of the lack or absence of innovation are to the point! Will the financial industry (and all the business grads therein) have the character (guts) to change and go back to “plain vanilla” financial products? Or, will they brandish even more “eloquent” language to continue hiding behind purported intellectual superiority and sophistication underpinning some ‘next generation’ of innovations? There remains some trust in society …but it will eventually disappear altogether and can ultimately only be restored through meaningful action taking as described in his article – This change can not start soon enough.

    One more quick idea…the article (and some other discussions) got me thinking about the poor farmer who struggles to produce food that is regulated to bits. In the instance of material consumption it is so clear that the consumer is easily hurt by carelessness – whether intended or not. However in the examples of the “innovation” and sale of financial instruments, the deregulated environment permits some pretty nasty psychological head games. Yet the proof is NOT lacking that the complicated manner of ‘consumption’ of these products can cause very severe harm to people from which many often never recover….

  18. One Thousand Thanks for the link Mike. A very thoughtful logical solution to righting the many structural wrongs in the current consumer protection panjandrum. Call me cynical, but I don’t see much hope of the CFPA passing in it’s current form. The Obama team will bow down and appease the “plutocrats” and predatorclass swindlers and thieves on Wall Street who will feverishly resist any threat to “saftey and soundness” concerns. A watered down version of the bill will (like every other critical issue the Obama administration confronts) be passed that benefits the finance oligarchs and the predatorclass swindlers and thieves, and disatvantage the American people. The status quo will not be changed without real courageous leadership willing and determined to place the best interersts of consumers (the American people) in front of the abuses and wildly exhobidant profiteering (at the consumer and Americans people expense) of the predatorclass and the finance oligarchs. Tragically we have neither courageous nor determined leadership, so as in every other critical issue confronting the American people – NOTHING WILL CHANGE!!!

  19. ..still thinking about this brief..
    The focus on FUNCTIONALITY as you quoted out of the brief – ie. the function of any given financial product is I believe, a key area that needs to be explored and opened up to evidence based analysis. This could / should (hopefully in future) inform how both theoretical and legal frameworks can evolve to work for the consumer.

  20. The point about disclosure encouraging competition is one that has some interesting scholarly foundations behind it too – Dan Carpenter at Harvard has written precisely on the role of regulatory agencies in improving the market VIA improving the information that companies provide to consumers. His work started on the FDA (classic book The Forging of Bureaucratic Autonomy).

    More recently he talked about this directly in the context of why a CFPA needs to pass – drugs and financial products are different, of course, but the lessons for designing incentives to provide real information to consumers are pretty cross applicable.

    Click to access TobinProject_ConsideringAnFPSC.pdf

  21. Once more the baseline scenario fails us. Those of us reading here would likley support such an agency, but there are no petitions to sign or any way the web site has for allowing our voices to be heard in washington. It is one thing to write about all the problems. The baseline scenario nedds to take the next step and get involved in letting our voices be heard.

  22. CPA works relatively well here. It doesn’t have any significant power and apparently no one has captured it. If it was, the internet would be full complaints.

    It mainly monitors that consumer protection laws are followed, gives advice to consumers of the legality of contract terms and instructions how to handle problem situations.

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