Regulatory decisions should be inclusive and based on facts


Creating the federal Consumer Financial Protection Bureau (CFPB) was never a good idea. Now that the Bureau is up and running, its actions are removing all doubt.

New auto-lending rules stand out as the latest example of the CFPB’s shortcomings. Due to these new rules, buying a car may soon become more difficult.

Specifically, the Bureau would like to limit the ability of auto dealers to arrange financing for their customers with third-party financial institutions. The consequence of these new rules, if implemented, will be decreased competition among lenders, reduced consumer’s access to credit, and higher borrowing costs for consumers. Ultimately, this new rule fails to fulfill the CFPB’s mandate to protect consumers.

Making matters worse, all too often the Bureau relies on shoddy research to inform rules it makes in secret. A new report from the Bipartisan Policy Center (BPC), while generally a supporter of the CFPB, raises some red flags about the agency.

Specifically, the BPC concluded that when the Bureau chose not to seek outside input, instead opting for a “closed, internal deliberation process . . . the results were problematic.”

The BPC’s findings aren’t earth-shattering. Common sense would dictate that collaboration among experts with varied opinions — as well as rigorous intellectual standards — delivers better research and rulemaking.

But it’s troubling that the BPC was able to find numerous examples where the Bureau did its work in secret — and ended up producing flawed research.

After all, today’s research underpins tomorrow’s regulation.

Take a report the CFPB released last year in conjunction with the Department of Education on student loans. After the report’s publication, the CFPB had to put out a 19-page document detailing 36 significant methodological and numerical changes to the data set in the report.

The CFPB insists that the extensive corrections “do not impact the Report’s conclusions or policy recommendations.” But with such acknowledgements of error becoming more common, it’s hard to trust the work the Bureau is producing.

This wasn’t the only time the Bureau’s research has been called into question. In April, the CFPB published a report attacking payday lenders for making “predatory” loans.

As background, a payday loan is an unsecured, short-term loan or cash advance that the borrower promises to pay back from his next paycheck. In a standard transaction, a borrower writes the lender a postdated check for the loan plus fees — usually about $15 for every $100 borrowed.

The CFPB report examined a one-year period and found that a typical borrower used payday loans frequently — with the median user taking out more than 10 loans annually.

Because annualized interest rates on payday loans are higher than those on credit cards or conventional bank loans, the CFPB concluded that consumers who borrowed from payday lenders risked becoming trapped in a cycle of ever-increasing debt.

But four months after the CFPB released its report, an economist with the Federal Reserve Board effectively debunked many of the Bureau’s key findings on sustained use.

The Fed’s study looked at 56 million payday loans over a five-year period — a far more comprehensive data set. The report calculated the median number of loans for payday loan recipients over that 5-year period at seven. That’s about one-tenth the figure touted by the CFPB.

The CFPB knew it had overestimated how often the median borrower takes out a payday loan. A footnote in the Bureau’s report acknowledges that its methodology undercounted “low intensity users.” The CFPB excluded 92 percent of one-time borrowers in its sample and counted every 12-time borrower in order to conclude that payday lending created high levels of financial dependency.

The CFPB’s carelessness with data is even more concerning because the agency collects reams of sensitive financial information on Americans. Little is known about what the CFPB does to ensure the financial data they collect are secure — and whether they’re collecting that data lawfully.

The policymaking process is imperfect, and no agency will always get things right. But two years after the creation of the CFPB, the agency’s track record does not inspire confidence.

While the CFPB would be ideally shut down, at a bare minimum, greater transparency and more collaboration with outside experts should be required. Expecting higher standards from the CFPB is the only way to keep the agency from making avoidable mistakes that have lasting consequences for consumers.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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