The Consumer Protection Paradox

Posted: 6 Feb 2014

Date Written: January 30, 2014

Abstract

The Consumer Financial Protection Bureau (CFPB) was created under the Dodd Frank Act with a primary goal of regulating consumer protection with regard to financial products and services. In an effort to creating a resilient banking/ financial services sector, numerous proposals in the form of laws have been enacted since the financial crisis and the financial institutions are spending a lot of time and resources getting their arms around these laws and their possible impact on the conduct of their businesses. Many financial institutions are uncertain on how these laws can affect them. This uncertainty hovers more around the clique of community banks and the mid-sized financial institutions.

The CFPB has jurisdiction over these institutions and a lot of concerns have been expressed by the banks under this domain. One major concern is the potential impact of the Qualified Mortgage rule that recently came into effect. The problems that the banks envision are primarily driven by the limited resources and cost of regulation compliance. Assuming the banks overcome the bottleneck of limited resources, in the context of the Qualified Mortgage rule, there are a plethora of other challenges that could present before them. The rule has a great propensity to hurt the consumer base from a community standpoint. Fewer consumers could start getting qualified for a mortgage as these mortgages are typically held on the institution’s balance sheet. This can happen for the following reasons:

• The institution does not perceive an ability to obtain a safe harbor by writing these mortgages.

• The risk of loss and the potential risk of litigation can make the mortgage underwriting for this class of consumers prohibitive.

• Inordinate efforts to obtain a balance between consumer retention and safety and soundness of the institution can further narrow their consumer base.

• The rule for a balloon loan to qualify for a QM status could also limit loan originations in the community banks belonging to many state jurisdictions.

It is also worth speculating the possible consequences arising from the above stated challenges.

• Several small banks can start shutting down their mortgage operations.

• The institutions may have to revisit their business strategies in order to become viable and efficient.

• The reforms could serve as a catalyst for business model changes at many of these institutions.

As these institutions are trying to grapple with issues relating to regulation compliance, it is a common notion among the market entities that these institutions are excessively victimized through regulations. Denying access to credit to the smaller consumers through the smaller financial institutions could put both parties in jeopardy. It may thus be worth for the agencies to revisit these clauses in order to ensure a safe access to credit. Any measure in this direction could only translate into consumer protection and in turn help the institutions at large. If a federal body is being designed to protect the consumers while preserving credit access, as the name (CFPB) suggests, the mandates governed by the body must achieve just that and any measures contrary to its philosophy become paradoxical.

Suggested Citation

Dharan, Sushmita, The Consumer Protection Paradox (January 30, 2014). Available at SSRN: https://ssrn.com/abstract=2390746

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