Consumer Choice and the Consumer Financial Protection Bureau

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Whether government should prevent consumers from making mistakes remains an open question.

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Criticism of the powers, role, and existence of the Consumer Financial Protection Bureau (CFPB) persists nearly a year and a half after the agency was created by the Dodd-Frank Act of 2010.

CFPB is designed to be a credit industry watchdog looking out for consumers’s best interests.  But a common complaint is that the CFPB is too powerful, and that consumers should have “the freedom…even to make bad choices.”

In a recent paper, Melissa Jacoby, the Graham Kenan Professor of Law at the University of North Carolina, writes that objecting to CFPB’s authority “reflects the questionable proposition that true individual preferences adequately explain credit product selection.” Jacoby describes the CFPB as correcting problems in the consumer credit market, following in the footsteps of the Truth in Lending ActFair Credit Reporting Act, and other laws passed before Dodd-Frank.

Richard Epstein, law professor at the University of Chicago and New York University, similarly observes that a variety of statutes and regulations already exist that outlaw fraud and require disclosure on key terms.  But he writes that adding new financial regulations will only “do more harm than good.” In his view, “we have already passed the point of diminishing returns for additional ex ante regulation in financial markets.”

Jacoby disagrees, citing research showing “that African Americans and Latinos pay more in closing costs on their Federal Housing Authority-insured loans than white borrowers.”  She questions whether these outcomes reflect the product of true choice.

Whether consumers receive adequate disclosures is one thing, but whether they can then make rational decisions is another, even if they have the benefit of full disclosure.  According to Larry Ribstein, the Mildred Van Voorhis Jones Chair in Law at the University of Illinois, behavioral economics research shows that people make irrational decisions because of various biases. Not only do consumers make mistakes, Ribstein writes, but so do government bureaucrats who carry out programs are susceptible.

Ribstein concludes that he would rather make a mistake “than pay a bureaucrat or politician to save me from my mistake.” At least some politicians would seem to agree, as charges that CFPB possesses excessive power recently led the Senate to block the confirmation of President Obama’s nominee to head the agency — and several Republican presidential candidates have vowed to work to repeal Dodd-Frank Act if elected.

The ultimate role that government should play in protecting consumers from bad choices is likely to remain a contested matter for some time.