Despite all it accomplished in its first five years, the Consumer Financial Protection Bureau has its detractors.
The new Republican Party platform calls the CFPB a “rogue agency” and claims that “its one-size-fits-all approach to every issue threatens the diversity of the country’s financial system.”
Other critics contend that the consumer watchdog’s enforcement actions and penalties are limiting people’s access to certain financial products, mainly credit.
On that last point, the opponents are right. The CFPB is working on various rules that could curb access to money for many borrowers. It is finally focusing its rulemaking powers on three key areas: arbitration clauses, payday lending and debt collection.
Arbitration clauses. The CFPB was charged by Congress to study the use of mandatory arbitration clauses in consumer financial markets. And in May, it announced that it was proposing rules that would prohibit these clauses.
We as consumers are constantly signing away our rights to sue as a class, thanks to clauses buried in service or product agreements requiring arbitration to settle disputes.
Tort reformists hate that the CFPB is going after arbitration. Plaintiff lawyers will end up the winners, they contend, and consumers will have to pay more for credit products.
I’m not a big fan of class-action lawsuits because individual consumers rarely get substantial compensation when they win. The judgments always sound impressive, but when you subtract attorneys’ fees and divide the awards among hundreds of thousands — if not millions — of consumers, the payoff for individuals is pitiful. But the lawsuits do have the effect of stopping or curtailing bad and unethical business practices.
Payday and auto-title loans. In June, the agency proposed rules to rein in the small-dollar loans made to folks who often can’t pay as promised with their next paycheck. The rules would also include auto-title loans, for which people put up their paid-off vehicles as collateral.
When people can’t pay off these loans, they often end up borrowing again, creating a cycle of payday-loan dependency. One report by the CFPB found that about 1 in 5 borrowers who took out an auto-title loan had their car or truck seized after they failed to pay off the debt. Eighty percent of the time, people using vehicle-title loans signed up for another title loan the same day their previous loan was repaid.
With these types of loans, lenders don’t look at ability to pay. Borrowers just need to have a job or a clear title to the automobile. Under the proposed rules, lenders would have to determine whether a consumer could afford the loan when taking into account living expenses and major financial obligations.
There would also be a limit on the number of short-term loans people could take out in a row.
Debt collection. In July, the agency said it was considering rules to make sure debt collectors are collecting the right debts from the right people. Often when companies buy debt, there are few details in the consumer’s file. The new rules could include requiring debt-collection companies to verify that a debt was owed before contacting consumers.
Collectors couldn’t oppressively hound people. They would be limited to six attempts at reaching a debtor per week. They’d also have to make clear if the debt they are trying to collect is too old for the borrower to be taken to court.
The proposed rules are already drawing criticism. They will burden the industry, opponents say. Legitimate collection efforts will be harder, critics contend, and the result will be less available credit and higher costs for that borrowed money.
Access to credit is an important economic driver in our economy. But that availability has become an albatross for a lot of people.
People want a credit card so bad, they don’t care if some of their legal rights are restrained. And they find themselves in such a financial bind, they use loans that sink them further into debt.
That’s why the CFPB has to ignore many of its challengers whose intentions are biased in favor of doing business as usual.
Boilerplate arbitration clauses prevent many consumers from participating in class-action suits, which can force firms to change bad behavior. Payday lenders prey on people with financial challenges or poor money management. And unethical debt collectors are violating the spirit and intent of the Fair Debt Collection Practices Act.
The proposed rules could very well result in limiting consumer choices. And in many cases, that is exactly what should happen. Some people need protection from bad financial practices and, frankly, their own bad decisions.
Write Singletary at The Washington Post, 1301 K St. NW, Washington, D.C. 20071 or firstname.lastname@example.org. To read more, go to wapo.st/michelle-singletary.