King Richard Strikes Again!
King Richard is at it again.
In the latest example of the almost dictatorial powers he exercises over virtually every consumer product in the country, CFPB Director Richard Cordray yesterday took to browbeating banks and credit unions by strongly encouraging them to offer cheaper account options that don’t include overdraft protections and admonishing them to do a better job reporting information to the credit bureaus. His performance demonstrates why Congress has to work with the next president to vest the Director’s powers in the hands of an appointed board.
In a letter to the CEOS of the nation’s largest banks the Director made the case for low-cost accounts:
“Right now, much of the industry presents consumers with a binary result – either an applicant passes a standard screening process to obtain an account after identifying any credit risks posed by the applicant’s history of misuse or mishandling of some prior account, or the applicant is blocked from accessing the banking system altogether. There is, however, a third possibility, which is to offer all applicants a lower-risk account (whether a checking account or a prepaid account) whereby the applicant cannot pose the same level of risk to the institution. Accordingly, the same applicant need not be screened out of the banking system by applying the same risk thresholds that are used to determine eligibility for a standard checking account.”
(Incidentally low-cost accounts have been around in New York since 1994 when the legislature passed a law requiring banks and credit unions to offer low-cost accounts. Today consumers meeting certain conditions are entitled to accounts with at least eight fee free transactions a month. N.Y. Banking Law § 14-f ; 3 NYCRR 9.7). it’s not clear to me what exactly New York institutions should be doing that they are not doing already.)
In his speech he combined this heartfelt appeal for cheaper accounts with a warning that “Through our supervisory work, we have found that some of the largest banks lack the appropriate systems and procedures to furnish accurate information on millions of accounts” As a result, the bureau issued a bulletin warning banks and credit unions that they must meet their legal obligation to have appropriate systems in place with respect to accuracy when they report information, such as negative account histories, to the consumer reporting companies. More effort and rigor are needed to make sure that the risks consumers actually pose to potential financial providers can be evaluated correctly.”
Why do I think the CFPB went too far yesterday? It prides itself on being a data driven organization. But I find it incredibly hard to believe that the financial industry writ large is systemically ignoring the Fair Credit Reporting Act. I find it even harder to believe that this systemic indifference is so pervasive that it is a root cause for why there are so many unbanked consumers in this country.
It also prides itself on being heavily influenced by advocates of behavior economics such as Cass Sunstein the author of Nudge. But The CFPB is no longer nudging; it is telling institutions what products they should offer and why. It is becoming increasingly clear that the Bureau is driven only by the data that leads it in the direction it wants to go.
At its core , there is a lack of understanding that banking is like any other business. It costs money to safely hold people’s money and those costs have to be accounted for.