New consumer agency still hasn’t won over critics

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Hidden fees, penalties, surcharges and other “gotchas” drive consumers bonkers, but some companies love them.

In the years leading up to the financial crisis, many credit card issuers and other lenders had created a labyrinth of complex fee charts that confused borrowers and made for easier profits.

In the aftermath of the Great Recession, Congress passed sweeping financial reform with the intention of preventing another systemic financial collapse. Known as Dodd-Frank, the law included hundreds of new rules governing the way Wall Street works, but to regular consumers, the law’s most visible provision involved the creation of the Consumer Financial Protection Bureau.

The agency’s chief task was to make sure financial products were rid of gotchas, or “tricks and traps,” as CFPB inventor and now Massachusetts Senator Elizabeth Warren liked to call them.

Dodd-Frank hit its fifth anniversary recently, and the CFPB celebrated its fourth anniversary. But not everyone is coming to help sing “Happy Birthday.”

“In a very short time, we have done new and important work,” the CFPB’s Richard Cordray said. The agency says through various enforcement actions, it has helped get refunds or other kinds of relief to 17 million Americans — $10 billion worth of relief.

But at what cost? Dodd-Frank and the CFPB have vocal critics who say the new regulations it has created have hurt both small lenders and consumers, ultimately making the economy less stable.

During a hearing before the House Financial Services Committee marking the anniversary this month, some argued CFPB rules have led to decreased access to traditional credit products, which forces low-income consumers to use more expensive lending products.

“In the five years since the law came into effect it has resulted in higher prices and reduced choice for consumers and has done little to increase consumer financial protection,” said Todd Zywicki, George Mason University law professor and frequent CFPB critic. “That Dodd-Frank squandered this historic opportunity to modernize and reform consumer protection laws for the benefit of consumers was, therefore, particularly disappointing.”

Jeb Hensarling, a Texas Republican House member who serves as the chairman of the House Services Committee, said the elimination of many “free” checking accounts is one example of the CFPB hurting lower-income consumers.

“Before Dodd-Frank, 75 percent of banks offered free checking. Two years after it passed, only 39 percent did so,” he wrote in a Wall Street Journal op-ed. “Bank fees have also increased … leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.”

A 2013 FDIC survey found that 13.4 percent of households said the main reason they were unbanked was because fees were too high or unpredictable, while 35.6 percent cited not having enough money to have an account.

Zywicki made a similar point at the hearing.

“The CFPB found a significant decline in the percentage of households that had (credit) cards, from 76 percent to 71 percent,” he said. “Loss of access to credit cards has forced those consumers into great reliance on higher-cost products.”

During a hearing last week, Senate Banking Committee chairman Richard Shelby (R-Ala.) called for Congress to restructure the CFPB so that it has control over the bureau’s spending and to have “the ability to conduct meaningful oversight.” Sen. Sherrod Brown (D-Ohio) countered that such a restructure would weaken the CFPB.

The CFPB points out that 650,000 consumers have filed complaints with the agency during the past four years, and that many of those consumers would have been unable to complain effectively before the agency’s birth.

In his speech, Cordray told one such story from a consumer named William:

“We heard from William, who was receiving calls for a debt he did not owe. William tried to resolve the issue for more than four years, and saw his credit being ruined in the process. He said, ‘None of them could do anything … except tell me I had to pay them the $8,500.’ But because he submitted a complaint to us, he was able to end the prolonged standoff in just one week,” Cordray said. “Every success of this kind is a thrill for us. One consumer tagged her story about the relief she and her husband got from our handling of a mortgage complaint with the theme from Mighty Mouse: ‘Here They Come, to Save the Day!’ We all got a good laugh out of that one, but it was also poignant because apparently it was exactly how she felt.”