David S. Evans, Joshua Wright
Date Posted: November 2009
The Consumer Financial Protection Agency Act (“CFPA Act”), introduced by the U.S. Department of the Treasury in June 2009, proposes sweeping regulation of consumer lending and borrowing. As we showed in “The Effect of the CFPA on Consumer Credit” (hereinafter “Evans and Wright (2009)”):
o The CFPA Act creates massive litigation exposure for lenders facing (a) potential lawsuits from state and municipal governments for violating more stringent financial protection regulations that those entities can adopt pursuant to the CFPA Act; and (b) litigation under the CFPA Act’s new and undefined standards for engaging in unfair, deceptive, abusive, or unreasonable practices.
o The new Agency would impose significant costs on lenders who would be required to: (a) offer to consumers on a preferred basis plain-vanilla products designed by the Agency either before offering their own products or at the same time; (b) seek prior regulatory approval for new lending products which could be defined as minor variations on existing products; (c) face the risk of having lending products banned altogether; and (d) have to comply with various other rules and regulations.
This note responds to a recent paper by Professor Adam Levitin offered in response to Evans and Wright (2009). As a prefatory matter, his paper is filled with various ad hominem attacks which we will ignore. Instead, we focus on the substance of the issues in contention. Professor Levitin’s basic substantive objection is that he disagrees with our estimates that the Treasury Department’s bill would increase interest rates by at least 160 basis points and reduce net job creation by 4.3 percent under plausible assumptions. Professor Levitin’s criticisms are misguided and we stand by those numbers as lower bounds on the effect of the Treasury’s CFPA Act on the economy. We also note that Professor Levitin has disputed virtually none of our findings that the CFPA Act would impose high costs on lenders and ultimately result in denying borrowers choice.
We think it is impossible to read the CFPA Act without concluding that lenders will face higher costs as a result of, among other things, dealing with the new Agency, being forced to offer products designed by a governmental body rather than themselves, coordinating the sale and distribution of financial products across regulatory regimes varying across the fifty states, and facing the increased possibility of fines and litigation under a novel and ambiguous “abusive” practices standard. While we believe there is a debate to be had on the costs and benefits of the CFPA Act, it is difficult to fathom a claim that this particular Act will not impose significant costs on lenders and that those costs will not be passed on to borrowers. Sound public policy should be based on a careful analysis of the costs and benefits of the various proposals. We do not believe Professor Levitin has made a constructive contribution to that deliberation but encourage him and others to do so as Congress considers the CFPA Act of 2009.