Regulatory Reform Panel Raises Important Discussion

The George Mason University Antonin Scalia Law School recently hosted a forum titled: Regulatory Reform, Transparency, and the American Economy. The event raised both liberal and conservative views on innovation, privacy, and personal responsibility.

The opening panel – Financial Innovation and Innovative Financial Regulators -- included Todd Zywicki, a law professor at George Mason whose name has been raised as a possible replacement for CFPB Director Richard Cordray; Charles J. Cooper, a Partner at Cooper & Kirk, PLLC, and David C. Vladeck, a law professor at Georgetown University and formerly Director of the Bureau of Consumer Protection at the Federal Trade Commission.

Zywicki presented a summary of a recent paper he co-authored, titled Consumer Protection at the FTC and the CFPB; his remarks focused on the CFPB part. Zywicki’s stance as a libertarian is clear (he also authored the 2015 paper, The Consumer Financial Protection Bureau and the Return of Paternalistic Command-and-Control Regulation). He began by announcing that, under the former Director, the CFPB has been protecting consumers from themselves.

Zywicki offered a theory of two approaches to regulation: Market Reinforcing and Market Replacing.

A Market Reinforcing approach makes markets work better in their ability to match consumers with products. He said the original version of Truth in Lending supported this. A Market Replacing approach incorporates concepts such as usury ceilings and the CARD Act.

Zywicki said the CARD Act has prevented banks from being able to price risk efficiently, which has led to low income households having 11% fewer credit cards. He blamed the Durbin Amendment (which required the Federal Reserve to limit fees charged to retailers for debit card processing) for causing a doubling of bank fees and a drop in free checking accounts from 76% to 38% since it was enacted as part of Dodd-Frank in 2010. He argued that regulations like these have caused an increase in the unbanked population, and an increase in the need for short term lenders – in other words, he said, eliminating the supply of credit doesn’t eliminate the demand for credit.

He suggested that a new approach for the CFPB could include: innovation, inclusion, choice, competition and respect. Indeed, the stated vision in the 5-Year Strategic Plan released this week by Acting Director Mick Mulvaney resembles these principles:

Free, innovative, competitive, and transparent consumer finance markets where the rights of all parties are protected by the rule of law and where consumers are free to choose the products and services that best fit their individual needs.

Zywicki recommends the following:

1. Create a clear regulatory framework, including reducing rulemaking by enforcement
2. Pay attention to policies impacting low income consumers (such as the small dollar loan rule); treat them as consumers versus charity cases. Use incentives versus mandates.
3. Recognize the full ecosystem – for instance, payday vs. overdraft. Think about regulating parts of the ecosystem together versus separately.
4. Treat borrowers like adults; protect them from fraud and deception, but don’t ban products without putting something else in their place.

Charles Cooper spoke about the effect that Operation Chokepoint has had on banks and payday lenders (full disclosure – his firm represents a payday lender that has been harmed by the policy). He made the following claims:

• The chokepoint policy has pressured banks to terminate highly mutually beneficial, long term relationships across the U.S., en masse, without a business explanation, following no wrongdoing or change in procedures.
• Reputation risk has been redefined through informal guidance notices; Banks now need to protect the reputation of all of their customers, as well as their own.
• Banks have been pressured to end relationships with 40 types of industries with poor reputations, including many which are lawful and regulated (i.e. credit repair, firearms, coin dealers and payday lenders).
• Banks that cancelled relationships with his clients were candid verbally but guarded in writing about what caused them to end the business, but said that one letter mentioned the threat of regulatory action against banks who do business with payday lenders.

David Vladeck, who clearly enjoyed a relationship of respect with the other panelists (refreshing to see, even though they were clearly on opposite sides of the issue), suggested the reports are inflammatory and not accurate.

He said that operation chokepoint had focused on payment processors that supported scams – not disfavored industries – as measured by the signal of chargebacks. While Charles Cooper mentioned payday lenders as a heavily regulated group, Vladeck noted that this isn’t always the case because many are affiliated with Indian Tribes, who claim immunity from state and federal law. He also noted that if there were excesses [of chokepoint implementation] there ought to be consequences, but those excesses were not the intention of the initiative.

Vladeck said he agrees with some of Zywicki’s recommendations for a more effective CFPB, including:

• Innovation – we don’t have sensible alternatives to traditional debt traps
• Inclusion of the unbanked – we need to find finance institutions that want to service this population
• Choice

Finally, he highlighted the fact that one in seven Americans are victims of Fraud every year. Economic incentives lead to massive data breach because the cost of the penalty is often a pittance compared with the cost of fixing it.

insideARM Perspective

Discussions like these are extremely interesting in the context of a shifting regulatory leadership environment. As it relates to debt collection, I think one of Zywicki's recommendations is especially salient; consider the whole ecosystem. In this case, that means creditors, collectors, and the technology that connects them to each other and to consumers.