Inside Financial Services

This Is No Way to Reform the CFPB

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The bad ideas from Washington keep on rolling in. From Thursday’s American Banker:

House GOP Bill Would Give
the CFPB a Dual Mandate

WASHINGTON—House Republicans will likely unveil legislation within the next few weeks aimed at curbing Consumer Financial Protection Bureau regulations by giving the bureau a dual mandate Rep. Steve Stivers said Wednesday.

The Ohio Republican said that instead of just consumer protection, arguably the agency’s only mandate at present, it would be required to watch credit availability as well. He compared it to the Fed’s dual mandate of employment and price stability. [Emph. added]

So in addition to ritually browbeating the banks, the CFPB would also be required to ensure they’re making enough loans and, presumably, making the right kind of loans. Brilliant! There are few more effective ways to slow economic growth and undermine a financial system than for the government to insert itself into decisions regarding the allocation of credit. If you doubt it—and I doubt you do since the bad memories are still so fresh—just look at the federal government’s push not so long ago for lenders to extend mortgage credit to low-income, subprime borrowers. At bottom, banks were making loans that, on strict economic-underwriting terms, they wouldn’t have made. But they wrote the loans anyway, because a) the GSEs had effectively issued subprime quotas, and b) the banks knew the GSEs would buy the loans, and so figured they’d be off the hook, regardless. Impeccable logic! Unfortunately, the system blew up anyway.

Congressman Stivers’ misbegotten idea presumably won’t produce a calamity on the scale of the subprime meltdown, but you can count on the fact no good will come of it. If a bank chooses not to write a prospective loan, it’s likely for a sound economic reason. A lack of creditworthiness of the borrower, say. Or perhaps the prospects for project to be financed are too uncertain. But if Stivers’ bill gets passed, more iffy loans will be written than otherwise would be, just to please the regulators. Defaults will rise, bank profits will dip, bank balance sheets will suffer . . . you’ve seen the movie. If Congress is smart, this bill is headed nowhere.

Does the CFPB need to be reformed? You bet! But this is no way to do it. Better yet, Congress should summon the political will to pass legislation that eliminates the agency entirely.

What do you think? Let me know!

5 Responses to “This Is No Way to Reform the CFPB”

  1. jsc173

    Good grief.

    When it’s abundantly clear CFPB has far too broad of an unfettered, unsupervised scope, Congress is now being asked to consider making it even broader.

    Aren’t we about 2-3 steps away from nationalizing banking?

  2. SWPilgrim

    Cornfield antecedents painfully obvious in attempt to expand bureaucratic influence in areas of lesser competence. We are headed for a big bang similar to the deregulation of the US airline industry; we’re just not there yet in the cycle.

  3. etoleary

    This would represent a significant step in the direction of social engineering and macro allocation of credit. We have only to look at the damage done through the aggressive goals of increasing home ownership through GSEs. Why can’t we learn from recent history and just leave some things well enough alone? And this is before discussing whether the CFPB would be a logical or appropriate vehicle for such an objective if there were a national consensus to pursue it.

  4. JohnACritic

    The sad fact is big banks are not inclined to make loans to the little guy even when he or she has good credit and the ability to repay. They are only interested in making multi-million dollar loans which interestingly many times are not repaid. They do want your deposits though and of course they want those outrageous fees from you as well.

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