CHAMPAIGN, Ill. - With many Americans now spending most of their adult lives owing debts to financial institutions, the need for a consumer financial agency free of "regulatory capture" is now more acute than ever, according to a University of Illinois expert in consumer credit.
Robert M. Lawless, a professor of law, says the U.S. would benefit from an effective Consumer Financial Protection Bureau that will not serve as "the handmaiden of the industries it needs to regulate."
"'Regulatory capture' describes a situation where an administrative agency becomes beholden, or 'captured,' by the industry it is supposed to regulate," he said. "It's a huge problem in government, and we have seen extreme examples in the financial services industry, with the Office of the Comptroller of the Currency and the now-defunct Office of Thrift Supervision. To a lesser extent, there are similar complaints about the Securities and Exchange Commission."
According to Lawless, a national authority on bankruptcy law, there is no reason to think the agency would be immune to regulatory capture.
"It might have a good run, but at some point industry influences will inevitably creep in," he said. "I think a great part of the initial success of the CFPB will be its resistance to industry capture.
"The agency will do a lot of good for the current generation, but for the next generation, it might be another one of the alphabet soup agencies that critics complain are a tool of industry," he said.
The process of regulatory capture, a concept that is well known in political science and legal literature, is a byproduct of the insular culture that permeates Washington, D.C., Lawless says.
"It's not just the lobbying that is so prevalent in D.C., it also is that over time an agency gets to know the businesses and the people it regulates, so it is only natural that relationships develop," Lawless said. "After all, agencies are made up of people, but it is these sorts of relationships, between an agency and those who are regulated, that play a big role in the regulatory capture phenomenon."
Lawless says the agency can minimize the effects of regulatory capture if it hires front-line employees who are true believers in the agency's mission.
"Instead of hiring rank-and-file bureaucrats, hire people who are with the CFPB because it's something they believe in," he said.
Although he supports the agency's mission, Lawless says he would like to see an even stricter regulatory environment.
"In an ideal world, the bureau would go further than its current focus on forms and disclosure, but there are legal limits on what the bureau can do," he said. "If I had my way, I would go back to an era when there were usury laws, where you had interest-rate caps that were enforceable and had some bite to them. Although I would go that far, I recognize that there are others who would go in a different direction, with even less regulation in the consumer credit market. The CFPB was, in many ways, a compromise. We are living in an era in D.C. where compromise is not very popular. But compromise is the nature of our government, and that is the way things get done."
With the demise of the subprime lending market, it is tempting to think that abusive practices in the consumer financial products market have disappeared. But Lawless says new areas - such as mortgage servicing abuses and debt collection abuses - have emerged to fill the void, and the agency could play a big role in clamping down on abusive practices.
"The CFPB would have regulatory jurisdiction to take some action and could really do a lot of good to protect consumers in these areas," he said.
According to Lawless, scholars and researchers who are active in consumer-debt circles see a lot of problems in particular with the consumer debt-collection industry.
"The same sort of problems we had with mortgage foreclosures are also likely present with the debt-collection industry," he said. "There is reason to think that things like robo-signings are happening with debt collection, where the debt is transferred from purchaser to purchaser, and the person who holds it now does not necessarily have the documentation that they are the correct, true owner. And when they do have documentation, there are often concerns over the accuracy of the documentation, and whether it's been created after the fact."
Lawless, who has testified before a hearing of the U.S. Senate Subcommittee on Financial Institutions and Consumer Protection, is one of seven regular contributors to Credit Slips, a blog that focuses on credit and bankruptcy.