Solveig Singleton and Jerome Famularo
Financial service products and markets are complex, which is partly why some insist that consumers need the Consumer Financial Protection Bureau (CFPB). Ironically, the CFPB itself has failed to appreciate this complexity, enacting rules that do more harm than good because of unintended consequences.
This post, the third in a series on CFPB reform, surveys key proposals to improve the CFPB’s policy outcomes. Several proposals call for the CFPB to assess proposed rules using cost-benefit analysis (CBA), a method used by economists to determine quantitatively whether a policy has a positive net benefit.
Despite the difficulty of measuring some of the costs and benefits of regulation objectively, requiring the Bureau to consider a more rigorous CBA would be an improvement over the status quo. Imagine that you hear that policymakers plan to cap credit card interest rates at 10 percent to save consumers money. You think this sounds good! But then you read that studies show that interest rate caps reduce low-income borrowers’ access to credit. Most people would hope that well-meaning policymakers would study the likely consequences of their plan before acting.
The Bureau’s CBA Analysis Has Lacked Rigor
The Dodd-Frank Act requires the CFPB to consider the benefits and costs of its regulations, including any reductions in consumer access to financial services that may result from CFPB regulations.
However, the CFPB has not followed generally accepted principles and best practices in assessing costs and benefits. Problematic practices have included:
- Failing to provide solid evidence of claims of market failure.
- Failing to quantify benefits or costs that could be or have been quantified.
- Failing to estimate the net benefits of a rule.
- Offering unrealistic cost or benefit figures.
- Failing to identify or analyze alternatives to the rule the Bureau favors.
- Failing to adequately assess the effects of a rule on consumers’ access to or the price of financial services.
Proposals for Reform of the Bureau’s CBA Process
To improve the Bureau’s analysis, the Transparency in CFPB Cost-Benefit Analysis Act, sponsored by Representative Barry Loudermilk (R‑GA), would require the Bureau to explain the need for a proposed regulation, as well as why markets or other agencies cannot address the problem. The bill would require the Bureau to provide a quantitative and qualitative assessment of “all anticipated direct and indirect costs and benefits” of the proposed rule, including compliance costs, as well as its effects on competition and small businesses. The Bureau would be required to assess the costs and benefits of alternative rules and to explicitly justify the regulation if the costs of the rule exceeded the benefits.
The CFPB Dual Mandate and Economic Analysis Act, sponsored by Representative Tom Emmer (R‑MN), would establish an Office of Economic Analysis within the Bureau to assess the impact of its proposed policies on consumer choice, prices, and access to credit.
Some object to CBA, arguing that certain benefits and costs cannot be easily quantified, including fairness, human dignity, and psychological effects. These benefits are valued by some, but this is not a good argument against rigorous CBA. CBA merely provides information; the analysis is not the decision. A regulator may justify enacting a rule even if the quantifiable costs exceed benefits—but enacting rules in ignorance of their probable effects is foolish.
Furthermore, exploration of quantifiable effects may help evaluate “unquantifiable” effects: data might show that consumers would be willing to pay $5 more per month for credit under a fairer policy regime, but not $15 more.
A stronger objection to CBA is that even quantifiable costs and benefits are hard to determine objectively, and data and methodologies can be manipulated. The Environmental Protection Agency’s estimates of the social cost of carbon varied from $43 per ton under President Obama to $3 to $5 under President Trump 1.0, then to $190 under President Biden.
However, requiring CBAs to be conducted by economists with interests that are not aligned with the interests of the regulators who propose a rule might reduce the temptation to skew CBA results. For example, the proposed Office of Economic Analysis mentioned above would operate independently of CFPB divisions responsible for rulemaking. Compared to the drafters of a proposed regulation, the Office’s economists might have less of a stake in shoring up a weak proposal. However, the Office might struggle to resist the demands of the Bureau’s Director. Manipulation might be best exposed by another executive branch agency, such as the Office of Information and Regulatory Affairs (OIRA), or by a more independent authority, like the United Kingdom’s Regulatory Policy Committee. Either way, this problem is not a valid reason for altogether avoiding regulatory CBA.
Conclusion:
CBA is not a panacea that guarantees regulations will have net benefits. However, explicit instructions from Congress reminding the Bureau not to skip steps in its CBA may help improve policy outcomes for millions of Americans. Good intentions are not enough.
Unfortunately, the quality of the CFPB’s economic analysis is not its only problem. Previous blogs have discussed issues with the Bureau’s structure and investigative overreach, suggesting that the best option would be to dismantle the agency.