A Failed Dirt-Finding Expedition on the CFPB

Oct 27, 2010Mike Konczal

mike-konczal-2-100Regulatory capture is dangerous. But you won't find it in the agency's new hires.

Today's New York Times came out with a bizarre hit piece on the Consumer Financial Protection Bureau and the first wave of hires. They attempted to argue that there are already huge conflicts between those staffing the creation of the Bureau and those that they will be tasked to regulate. This will be a problem for any agency, and it's one to be very conscious of and make sure that proper disclosures and vetting have occurred.

But what's so surprising about the article is how little they were able to find. After going through the record of the initial hires of advisors for the CFPB, the only thing they were able to flag was that Warren advisor Raj Date was, up until recently, a director of Prosper Marketplace Inc. The company is lobbying to be regulated as a bank, instead of regulated by the SEC, debating whether their practices constitute issuing securities. I read the piece waiting for a bang, but all I found was a whimper.

Having written a paper with Date on Glass-Steagall and the future of financial reform, as well as working with Date when he contributed to Roosevelt's Make Markets Be Markets financial reform conference on the subject of the GSEs, I was kind of curious to see if he was actually some sort of deranged financial hitman. But if this is all the 'dirt', I'm almost worried for the opposite reason: that the agency will be too academic and not take advantage of people involved in the shadier side of the financial world who want to repent.

The Times article relies entirely on the implied assumption that peer-to-peer lending is some sort of shady, fly-by-night operation. In reality, it is simply part of the over-hyped phenomena of trying to integrate the internet with new financial institutions. From Mark Gimein's very critical take on the company:

Person-to-person lending -- loans made by individual investors who had money to spare to borrowers hoping for better rates than they could get from banks or credit card companies -- was supposed to be to loans what eBay was to garage sales. Prosper.com, the pioneer, was one of most hyped internet startups of the last decade.

TIME Magazine chose Prosper.com as its top new website of 2007, and the Wall Street Journal featured it in a high profile story. Prosper television commercials picked out nifty stories like that of a New York cop who lent money to a Chicago fashion designer, and the press followed with quirky human interest stories (like a loan for breast implants). In short order, Prosper was followed by imitators such as Loanio and Lending Club -- the latter a Harvard Business Review featured in the Harvard Business Review's picks for “breakthrough ideas for 2009.”

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"Most hyped internet startups of the last decade." You don't get that impression from the Times article. It merely quotes a default rate to condemn the practice. And Prosper contested that measure of default rates when Gimein wrote about them for Slate, both as a solid measure of its business and particularly in the context of a gigantic credit bubble and the Great Recession (where everyone is having to take massive consumer credit writedowns).

In my personal opinion, in the same way middle-class people turned amateur stock analysts was the sign of a tech bubble, or middle-class people turned amateur realtors was the sign of a housing bubble, middle-class people turned amateur credit risk analysts and credit channel intermediaries was the surest sign of a credit bubble. But Prosper has been a useful experiment. It's challenged thinking about information, prices, the "wisdom of crowds" versus institutional information, fringe lending, and creative ways around low-quality high-churn payday-style lending, regardless of whether or not it is going to take off. Either way, wasn't the problem that the CFPB was going to kill small-scale financial entrepreneurialism? So isn't it good to include someone in the agency who has experience with it?

Even more striking is that the article fails to mention that Date and his former policy shop, Cambridge Winter, which they summarize as being "active in the Dodd-Frank debate", were really at the cutting edge of the consumer financial protection debate. I actually wasn't sure if the auto dealer exemption for consumer protection was something worth fighting until I read Date's Baseline Scenario post on the topic, Auto Race to the Bottom. Particularly pertinent was the excellent phrase: "Even by the low analytical standards applied to hastily arranged, crisis-driven corporate welfare initiatives, the exemption of auto dealers from the CFPA appears profoundly ill conceived. Exempting auto dealers would simultaneously be bad for consumers, bad for industry stability, and bad for what remaining sense of free-market integrity we still have." Heh.

He was also active in the Volcker Rule debate, bringing sanity to the discussion of the strengths and weaknesses of resolution authority (also here), and a whole ton of other research that created markers for serious financial reform.

The case against him is so weak that even Mark Calabria, director of financial regulation studies at the Cato Institute, who loves hitting a regulatory conflict and capture slowball over the plate, seems kind of bored with it when he's quoted: “It would be very difficult to find anybody on either side of the aisle on this issue who doesn’t have a financial interest. What’s important is that those conflicts get aired.”

The issue of regulatory capture is a serious one, and I'll worry when President Palin is appointing credit card company executives to run the CFPB. But if this is the 'worst' that can be found out the door, the capture part of it is the least of my concerns.

Mike Konczal is a Fellow at the Roosevelt Institute.

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