New CFPB Director Looks to Focus on Consumer Education
The Consumer Financial Protection Bureau was put in place in 2008 in the aftermath of the mortgage crisis. New director Kathy Kraninger is focused more on education than enforcement.
The financial crisis of 2007 exposed many cracks in the system, and once we started to right the ship a little, the Obama administration created a new department called the Consumer Financial Protection Bureau, or CFPB, to keep a more watchful eye on those in the industry to better protect us from harm caused by actions deemed inappropriate.
Their focus at the time was on the enforcement side, and this made sense given that so many people felt that they were being taken advantage of by big players whose only motivation was to take their money. We accept this in a capitalistic society, provided that deception is not used against us, deception such as convincing people that the mortgage backed securities of the day were top investment grade when the reality was that they were worse than junk.
This ended up fooling more than the public though, as some very big financial institutions went down for the count as well over this. Some needed a huge amount of government help to rise up off the mat, and some were left to die over it.
Creating the CFPB was a good idea in principle, although when we empower such an agency, we need to be careful that they confine themselves to reasonable bounds and not place too many restrictions upon business.
The appetite back then was to see some heads roll in the financial sector, as many people were angry about what happened and especially were disturbed by the perception that these financial leaders and their people were seen to walk away with not only massive bags of money, but even got rewarded further by all that bailout cash.
To be fair, the government really had no choice but to help them, and the idea that they were too big to fail was a valid one, as the pain that we experienced from these events would have been much greater if this support had not been given. If we held a public vote on whether we should do this or not, it is likely that the let them die side would have won, but these people would have come to regret that in the aftermath, and this is why it’s preferable to appoint experts to decide these things rather than an uninformed public.
We Need to Do Enough But Not Too Much
The natural tendency here is actually toward restraint, and the worry is that they will not do enough rather than too much. Regulators often err on the side of caution, and the banking industry certainly feels that way over the ensuing regulatory changes that this produced, but we’re more careful when it comes to enforcement.
The reason is the consequences of enforcement are more transparent, and while we may cause financial institutions to suffer a loss of profits that add up to the millions of dollars and not really be too troubled by it, like raising the capital requirements of banks, there is enough distance between the regulations and the effects that we can easily look the other way. When you fine a bank $100 million though, there is no doubt whose hands the blood is upon, whether justified or not.
The CFPB has clearly exercised prudence, and their biggest scalp to date, the Wells Fargo issue, involved clearly fraudulent practices which did need to be punished. If anything, they went light on Wells Fargo with only fining them $100 million plus a further $85 million in penalties in 2016. The use of the terms widespread and illegal together tells us just how hands off we are toward banks at times, where the bank got away with a lot of fraud before they finally were caught.
It could easily be argued that they got away with a slap on the wrist here, albeit a firm one, and that people should have gone to jail over this in addition to the fines. The bank was found to have fraudulently opened over 2 million accounts, including issuing over half a million credit cards, without people’s knowledge, in their quest for further profits.
The most amazing thing with this is that both banks and even some Republicans were up in arms over this. Imagine catching a bank committing widespread fraud and people thinking that they should be allowed to do these things to people. Ordinary folks would certainly be sent to jail for opening a credit card account in someone else’s name without their knowledge, and we cannot let anyone do this without consequences, as this throws our rule of law into disrepute.
Bailing out financial institutions is one thing, but allowing them to commit fraud against their clients and not be punished is an entirely different matter.
Wells Fargo called this “cross-selling,” although the act of selling usually involves some sort of disclosure to clients that they have actually been sold something rather than just opening things up in their name and not telling them. This issue runs deeper though, as banks may inform but not do so properly, which is what happens when you put the interests of the bank ahead of the interests of clients.
There Are More Dangers Out There Than Just Out-and-Out Fraud
Some banks have taken a more client-centric view of their business, but there are still a lot of accounts that are opened or upgraded when it is not in the interest of the client to do so, with the sole purpose of increasing sales. The culture of banks is still target focused for the most part, and these targets represent sales, not benefits to clients. We have this in other industries as well, but there is a fiduciary relationship of sorts at work here, and people trust bankers so they will often assume that they have their interests at heart here, which is often a mistaken view.
With a Republican president now in the White House, and Donald Trump no less, we would expect that the new appointee of the CFPB would have conservative leanings, which is the case with Kraninger. She’s also pretty crafty though, and is cloaking her less combative and more accommodating view of the industry as focusing more on what we can do to elevate the consumer to try to level the playing field that way.
This is sorely needed actually, as so many people do such a terrible job at managing their own finances, and part of the risk here with their being duped by banks is their ignorance of financial matters, which is really what is being preyed upon.
She remarks that “empowering consumers to help themselves protect their own interests and choose products and services to best fit their needs is vital to preventing consumer harm and building financial well-being.” While this is certainly true, actually successfully doing this is a much bigger challenge than we may believe.
We need to do both actually, educating people and keeping banks from preying upon them, but educating people to become competent in deciding these things isn’t something that you can just do in a press conference. This is a huge project where we’re nearly starting from scratch and requires a big transformation of our culture. Financial education needs to start when we’re young, and be seen as an integral part of our overall education, and it’s not something that you can just will into being through an ad-hoc proclamation like this.
Once the period of prescribed formal education has ended, which means high school at the latest, the horse has left the barn pretty much and we can’t just sit down every American in a classroom and teach them what they need to know. How Kranginer plans on achieving this goal is the biggest question of all here and one that may not even have a good answer.
Still though, we need to start somewhere, and having us at least acknowledge this need and its importance is a step in the right direction for sure. Hopefully the effort that ensues will be a genuine one and not just a way of paying lip service to this problem and use it to defer our will to crack the whip when needed.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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