While the purveyors of various financial products are focused on Consumer Financial Protection Bureau policies and rulemakings that pertain to their respective industries, it’s becoming clear many lawmakers view details of the CFPB’s specific regulatory activities as part of a larger fundamental question: Do the benefits of regulation outweigh the costs? Last week, a U.S. House lawmaker who has been highly critical of the CFPB challenged the agency’s director on that question.
Lawmakers seemed bent on examining all sides of Dodd-Frank this month, and they held several more hearings on the act and its impact last week. On July 24, CFPB Director Richard Cordray testified before the House Subcommittee TARP, Financial Services and Bailouts of Public and Private Programs. The subcommittee is chaired by Rep. Patrick McHenry, R-N.C., who recently criticized the CFPB for its apparent ties to the White House.
McHenry, however, did not mention concerns about the bureau’s independence, and only made passing references to the regulator’s policy initiatives and Cordray’s controversial recess appointment. Instead, his major concern was cost-benefit analysis.
“Inherent in regulation is both a cost and a benefit, and it depends on your point of view of said regulation whether or not you think we should focus more on the cost or more on the benefits. But certainly whether or not you feel regulation is proper and good or improper and destructive, you need to weigh both the costs and the benefits,” McHenry told Cordray. “As you go through ongoing rulemaking, the costs and the benefits, will they be accounted for? Is that a major concern that you have?”
Cordray testified that before the CFPB proposes a rule, a team of attorneys, economists and market experts evaluate alternatives in terms of their potential consequences for consumers, providers and the market. This team conducts quantitative and qualitative research. They consult extensively with industry experts, consumer advocates, other regulators, and stakeholders from small and large firms, banks and non-banks. He also noted that small-business review panels help the agency gather input from small providers such as community banks and credit unions.
“Some of our rules are longer than I would like because, in part, we are engaging in careful cost-benefit analysis,” Cordray said. “Moreover, the courts require, and are increasingly requiring the ability to review very careful analysis on this subject.”
McHenry asked Cordray if overregulation could ultimately lead to a lack of credit availability, and Cordray agreed it’s possible for the regulatory pendulum to swing too far following a financial crisis.
“I think that is always a possibility, so it’s important for us to be thoughtful and careful about what we’re doing and not just assume that because [a regulation is] meeting a problem that existed before, that everything that everybody could think to do is necessary and helpful,” Cordray said. “You can’t look at what happened in 2007 and 2008 without realizing that we need common sense reforms, and yet I would also agree that if the pendulum swings too far, you could compound the problem.”