1. The Consumer Financial Protection Bureau
from a Behavioral Economics Lens
How the Bureau is Transforming the Asymmetrical
Financial Market for the Consumers' Benefit
Marisa Carreon
Honors Thesis, Spring 2015

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Introduction
The bursting of the housing bubble caused the United States to experience a major
financial crisis which shocked our economy in 2007-2010
The housing bubble formed from increased borrowing brought on by low interest
rates for mortgages, thus increasing home-buying ability. The ease of borrowing, including
borrowing funded by foreign savings, made it easier to purchase a home well out of one’s
financial scope. Household consumption of disposable goods and housing became largely
based on debt as a result of “subprime loans,” or loans provided to borrowers with high[er]
risk for defaulting on their debts. But, as Skidelsky says, “when [housing prices] started to
fall, the debt balloon started to deflate, at first slowly, ultimately with devastating speed”
(Skidelsky 4). Subprime loans, provided by risk-taking banks and lenders, made the “debt
balloon” more fragile.
Mortgage-backed securities from these subprime mortgage loans decreased in value
along with the decreasing housing prices. Frightened by this, the banks ceased lending
altogether in order to avoid insolvency. Thus began the “credit crunch”. Skidelsky points
out that America was not the only country to experience a housing boom at the time,
though. He cites Martin Wolf in saying that the consumers of America and the United
Kingdom had become “highly leveraged speculators in a fixed asset” (Skidelsky 6).
Skidelsky asserts that financial innovation in the form of securitization--spreading the risk
of subprime loaning amongst a wider population of lenders—was a major contributor to

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the financial crisis. He points out that the amount of risk was not very well known because
of “over the counter” trading, and so the subprime mortgages were taken on without full
information on the mortgage consumer’s part (Skidelsky 7). Such innovation of risky
financial products and the collapse of the housing bubble were, to an extent, dependent on
each other, with housing being purchased largely through consumers taking on debt.
If it were not for the extensive involvement of subprime mortgages and borrowing
within the housing market, the United States may not have been involved in a financial
crisis of such a high degree. It is clear that the financial market, especially in regards to
lending to consumers, needed to change. Loans and their associated risk should have been
better managed, particularly by the lenders themselves, along with other financial
institutions. Even though innovation in the financial industry enabled consumers to have
higher purchasing power, the innovation was too risky and poorly handled. There ended
up being large costs to both consumers and institutions, and large negative consequences
to the economy as a whole.
In response, reform to the financial market was called for, and legislation such as the
Dodd-Frank Act was created for regulating the financial market. The Consumer Financial
Protection Bureau is one component of the Dodd-Frank Act. As the title suggests, its main
purpose is to provide protection to consumers from financial predators and fix market
imperfections by implementing regulations to make financial products and services more
transparent to the consumers. Ultimately, they are working to make the market less
asymmetric, or less skewed to benefitting one side (the lenders of the goods and services)
more than the other (the borrowers).

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As an institution established in 2011, the Consumer Financial Protection Bureau is
still fledging and creating its role in the market. My research goals are to explain the
economic theory behind financial market regulation and describe the Bureau’s main
aspects: its goals, methodology, organizational structure, and its role in financial regulation
for consumer protection. My analysis will piece together analyses from behavioral
economists which have been applied by the Consumer Protection Bureau in its methods for
regulations, and explain the reasons behind their methods. Also, I will examine Elizabeth
Warren’s works and her role in creating the Consumer Financial Protection Bureau. My
analysis will finally, include a critical look at the CFPB and its role in the financial market
today--how it regulates and supervises participants in the market, and how it has improved
the financial market for consumers.
Behavioral Economic Analysis
In economics, several conditions must be met in order to fulfill the requirements for
a “perfect market,” including but not limited to: inability to set market prices, no
externalities, no barriers for entry and exit, profit maximization, and perfect information.
Under these conditions equilibrium will be reached in the market, determining the price
and supply of the product and the equilibrium will be Pareto Efficient. In other words,
there is no other equilibrium that can improve the situation of one market participant
without somehow harming another market participant. Many economic models operate
under the assumption of perfect markets, and, as a result, can be largely inaccurate given
imperfections in real life. Behavioral economics originated as subfield in economics in

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order to better account for actual behavior of market participants and factor it into
economic reasoning.
“Behavioral Economics is the combination of psychology and economics that
investigates what happens in markets in which some of the agents display human
limitations and complications” (Mullainathan, Thaler 1). It emerged as a field of economics
because Thaler, Mullainathan, and other like-minded economists believe that humans do
not and cannot fulfill the role of Homo Economicus, a perfectly rational economic agent. .
They cover three basic concepts which limit the perfect rationality assumed in the standard
economic model: bounded rationality, bounded willpower, and bounded self-interest. Such
limitations are inherent in humans, thus Homo Sapien is the economic agent which
behavioral economics studies.
Rationality is bounded by limited cognitive capacity when making decisions,. Some
limits to cognitive capacity include “brain power” and time (time is limiting factor as a
consequence of brain power) (Thaler, Mullainathan 4). Thus it is unreasonable to assume
that all economic agents can solve complex problems of optimization when confronted by
such limiting factors. Furthermore, as Mullainathan and Thaler assert, it is reasonable for
people to utilize heuristics and other cognitive short cuts to make decisions.
Willpower, or choosing the optimum, is bound by temporality. Decisions may be
made with the short-run in mind rather than the long-term and so people may not make
optimal decisions. This is due to level of self-awareness and, more importantly, self-control
(Mullainathan, Thaler 5). Also contrary to standard economic theory, economic agents are
typically not entirely self-interested. Oftentimes, their self-interest is constrained by the

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human capacity to serve others in lieu of serving oneself. One example they use to
demonstrate this is the cooperation frequently observed between participants in prisoner’s
dilemma games and ultimatum games (Mullainathan, Thaler 6).
Thaler and Mullainathan continue by proposing that 21st century finance is the
largest benefactor of behavioral economics. The rise of behavioral finance, as they call it,
can be attributed to the abundance of testable predictions and data available (Thaler
Mullainathan 6). While their examples use the stock market and investors’ behavior, it
would not be a stretch to extend this claim to other parts of the financial market.
In a memo submitted to the Obama-Biden Transition project, Mullainathan,
Marianne Bertrand, and Eldar Shafir present a brief exposé on the banking status of people
in poverty in the U.S., from a behavioral-economics viewpoint. They cite that almost all of
the households without bank accounts are the poor households (Bertrand, Mullainathan,
Shafir 420). These households would be part of the “underbanked” or “non-banking”
population, and end up paying higher out-of-pocket fees and do not gain any returns from
savings. Overall, they claim that the poor associate bank accounts with higher costs in
comparison to paying out of pocket, but they end up paying more in out-of-pocket-fees
than they would otherwise (Bertrand, Mullainathan, Shafir 421). Mullainathan and his
colleagues label these associations as a “psychological barrier” to bank accounts. Directly
after that they suggest a simplification of fee structures. The benefit of restructuration to a
simpler form would help bring in and maintain bank customers because they would be less
likely to make late payments or abandon their account because of financial obstacles.

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They go on to suggest how their ideas could affect policy, and begin by suggesting
that policymakers ease the process through form simplification. “Reforms to improve the
transparency of eligibility rules and user-friendliness of forms should be considered. In
fact, a unique but simple eligibility form for all programs...may be especially helpful”
(Bertrand, Mullainathan, Shafir 422). The Consumer Financial Protection Bureau applies
this reasoning through their requirement for simpler forms for mortgages and loans. In
fact, they have a side-by-side comparison of current forms with their redesigned, simpler to
understand format under the “Know Before you Owe” section of their website.
Regulations within the financial services sector can take various forms and be
effective to various degrees, and so it is worth looking at the some of the methods
prescribed by behavioral economics. In 2008, Michael Barr, Shafir and Mullainathan
examine the implications of “behaviorally informed” decisions within the financial sectors
of the banking, mortgage, and credit card markets. Market competition and individual
psychology are the bases of their argument in determining how policy should be shaped.
By taking these into consideration, consumers should be able to make better decisions and
then the market itself is more competitive. Bounded rationality and bounded willpower
are implied throughout their argument that consumers do not always make the best
decisions, such as when they point out that borrowers may just simply look at the most
remarkable feature rather than choosing the option which is more optimal in the long run.
For instance, the borrower may be lured in to a loan because of remarkably low or next-to-
nothing interest rates. However it may cause them to neglect later increases in the interest,
particularly if the increases are hidden in extensive contract disclosures. Thus, regardless

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of some disclosure, consumers can still make poor decisions, and so regulation needs to
take various factors into account.
Barr and colleagues elaborate on the need for this “behaviorally informed
policymaking” in determining regulation and its methods (Barr 2). One of the first steps in
determining regulation is determining the nature of the firm’s reaction to consumers’
mistakes, because it can be used benevolently or malevolently depending on the firm’s
stance in the market. An example which Barr and coauthors use in their paper is when
consumers misinterpret compounding interest. Lenders can use a misunderstanding of
compounding interest rates with borrowing to exploit the consumer and increase their
profits from the accumulated interest at the end of the loan. Conversely, if consumers
misinterpret it within the context of saving then the banks will try to decrease the
confusion so that the consumers will have a higher propensity to save, and thus more
money to later spend for investment and fee payment. Therefore regulation should be
determined within a behavioral context in order to better accommodate potential
consumer mistakes and make the market more efficient.
Additionally Barr, Mullainathan, and Shafir assert that regulators must take the
interactions between individuals and firms into consideration when determining methods
for regulation. For example, regulators typically apply one of two methods: changing the
rules, or changing the scoring (Barr 3). By “changing the rules” they mean changing the
way in which federal consumer financial laws are regulated and enforced, whereas
“changing the scoring” refers to changing the profitability and penalties of violating
consumer financial laws. Leading up to the economic crisis of 2007-08, lenders were
incentivized to neglect the rules in place. Or rather, they played by their own rules since

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they financial market had been deregulated and the “rules” were not strongly enforced.
High profits from subprime and predatory lending made the financial “game” skewed in the
lenders’ favor because they did not face the risk of being penalized. Increasing regulation
will help to ensure that lenders’ predatory practices will be reduced.
While changing the rules will have a degree to some effect, it becomes more
effective in conjunction with policies changing the incentives and penalties as well.
Removing incentives for subprime lending and adding penalties for predatory behavior
deter firms from malevolent practices. Such incentives would include eliminating large
profits from predatory lending. Incentives irrationally popularized subprime loans leading
up to the crisis and overshadowed consideration of negative consequences on the market.
Therefore “changing the game” is most efficient when both the rules and the scoring are
changed (Barr 5).
Furthermore, it will have to include some methods which reshape the market
configuration, not just adjust behavior between firms and consumers. Perhaps the largest
problem in the structure of the financial industry is the asymmetrical information in the
financial credit market. Barr and colleagues mention this imbalance in the information
market, where lenders often have access to more information about the borrowers and
therefore know more about the borrowers’ financial positions. Typically this imbalance is
not corrected, considering the absence of regulation imploring lenders to disclose this
information along with the different options for which the borrower is eligible.
Additionally, if it is typically the borrower’s belief that the market works efficiently and
optimally, it becomes difficult to correct the imbalance given their assumptions on the
benevolence of the lenders, especially if they lack the capacity (whether from bounded

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rationality, myopia, etc.) to make informed, rational decisions. Their assumptions together
with the lenders’ desire for undue profits create exploited borrowers.
Not only are the borrowers negatively impacted by the unregulated market, but
lenders suffer as well. Like Warren, Barr and colleagues assert that innovation is harmed
by improper or misguided regulation. Because of the “scoring” and the attractiveness of
prices and products offered by “low-road” firms, the “high-road” firms suffer, they assert,
and some “high-road” eventually succumb and debase themselves. Overall, the market
moves further away from its efficient equilibrium.
The two main suggestions they offer in response to fixing the disequilibrium are opt-
out options for mortgages and credit cards, and framing—or creating a way of perception—
through disclosures in order to better guide consumer behavior. If framed correctly,
disclosures can portray the best options for the borrower with clarity. For instance, if the
disclosures were more streamlined and less cluttered they would exhibit better framing.
All relevant information would be laid out in an organized, easy-to-follow fashion and
elimination of word clutter would make it more difficult to hide elements not ideal to the
consumer, like substantial increases in interest rates after a short period of time. More
importantly, the right framing would enable to consumer to more easily decipher their
options and make a more informed decision based on the disclosure’s elements.
The opt-out options create a sticky default. In practice, the defaults will be akin to
standardized products which fit the “one size fits most” category. If the default involves
payments that are too high for the borrowers then they can opt out of the default and
choose a different option with a lower payment. Conversely, if the default payment is too

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low for the borrower’s preference and they end up paying too much in fees aggregated over
time, they can change to a better plan with higher monthly payments through the opt out
policy. The default is meant to automatically place borrowers on a payment plan which
generally works for both borrowers and lenders, but the opt-out policy allows borrowers
to change their plan if they so desire.
In the discussion on opt-out credit cards, Barr cites Warren in arguing for “clean”
credit cards as a product that should be offered by firms. Cards such as these would be
upfront and honest, devoid of hidden fees. They “agree with her that this would be a
significant achievement and would set an important example for others” (Barr 14).
Subprime loans originated from “innovations” in the market where lenders would compete
with each other by offering loans with next-to-nothing interest rates to lure in consumers,
and then charge them high fees shortly after reining them in to a contract. Honest credit
companies found it hard to compete against tactics such as those because they could not
draw in as many customers of their own. If a “clean” card was offered in the credit card
industry, then firms would be more compelled to compete with each other with the
increased shares in the market that such a card would bring. If the “high road” firms
utilized this, then it would especially incentivize good behavior on the firms’ behalf by
bringing in more profit for them versus the “low road” firms. Thus, Warren’s “clean” credit
card would effectively change both the rules and the scoring.
While opt outs and sticky defaults change the rules and the scoring, behaviorally
formulated disclosures are meant to change behavior. Although some disclosures are
already in place, they are framed or presented in a way which does not erase the market for
lemons (i.e. where the provider knows more than the consumer, and the consumer ends up

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with a product of lower quality) (Barr 6). Thus, the disclosures must meet certain
requirements which frame the disclosure in a way that enhances consumer understanding
and make more optimal choices prominent. One of the requirements mentioned numerous
times throughout the works I examined, for example, was that the forms for a loan could
not exceed a page limit of two or three pages. An example of a reformatted disclosure
provided on the bureau’s website combines two forms into one and which is shorter than
the two forms put together. The example form does not exceed three pages total in length.
Basic Ideas: Elizabeth Warren
The idea of a government agency monitoring financial products was popularized by
Elizabeth Warren, the now well-known university professor and senator advocating for
consumer protection. In her article “Unsafe at Any Rate” she discusses the lack of
regulation in the intangible financial market versus the strict regulation on physical
consumer goods. Tangible goods of consumption are tested for safety and will not be
released until they are safe for the public’s use. She argues that innovation differs between
the two markets as a result of the regulations; physical consumer products have become
safer through more avant-garde features, surely in order for the producers to more easily
pass the safety regulations and release their products sooner. Innovation in the financial
market, on the other hand, is not necessarily for the benefit of all involved. She points out
that financial contracts have become more incomprehensible and unnegotiable, and those
consumers are devastated by the consequences when they cannot fulfill their part of the
contract.

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Incidentally in the article, published in summer of 2007, shortly before the financial
crisis, Warren argued for the need for an agency similar to the Consumer Product Safety
Commission (CPSC) to encourage competition and protect the purchasers of the goods and
services (Warren 9). “The time has come to put scaremongering to rest and to recognize
that regulation can often support and advance efficient and more dynamic markets”
(Warren 10). Thus, she conceives the “Financial Product Safety Commission,” which later
evolves into the Consumer Financial Protection Bureau. She points to the CPSC as a fine
model for regulation, particularly because it is cost-effective and because of its recognition
by Congress as a necessary precaution for the market (Warren 17). According to Warren,
$89 billion in illegitimate credit card fees was collected from Americans in 2006. Surely,
she says, running a small regulatory agency costs less than $89 billion, and so a CFPB would
be cost-effective by saving Americans from having to pay credit card companies an
exorbitant amount in fees, and thus the consumers would have more of their income to
spend on other goods and services (Warren 10). In fact, according to the Bureau’s 2014
budget plan, the 2013 budget was a total of $542 million, while the projected budget for
2014 was $497 million (The CFPB Strategic Plan).
Innovation will also develop well within a regulated framework, Warren claims.
While there have been some regulatory measures taken, like the Truth in Lending bill, she
points out that their regulations do not coincide well with state regulations, and so the
inconsistencies make it easier to hide information within a lengthy contract that includes
legal information relevant to both the state and national laws. In essence, the financial
regulatory measures in place as of 2007 were not sufficient to protect consumers because
of the unregulated innovation leading to subprime loans. Arguably, those regulatory

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measures may have been more detrimental to them, leading to lengthy contracts with
hidden clauses which mislead consumers. Warren argues that a more established
framework for the financial market will focus innovation towards beneficial products and
services, unlike the system at the time which was innovative in ways to make their
contracts slip through more loopholes. Warren declares that “the basis for any free market
is full information” (Warren 18). Ultimately, regulation of the market is the means to
making the market safer for borrowers because it will remove information asymmetries
from the market, providing borrowers with more information than previously. 1
She has been a champion for the middle class for some time. Her autobiography A
Fighting Chance illustrates her beliefs on the need to protect America’s consumer from debt
resulting from borrowing (Lepore). She speaks to the people through her personal
narrative on how bankruptcy is a very palpable fear for many middle class families. In fact,
in one of her studies, “As We Forgive Our Debtors,” coauthored with her colleagues Jay L.
Westbrook and Teresa A. Sullivan, she shows how those from the middle class are the ones
most often filing for bankruptcy, contrary to what one might assume (the poor) (Lepore).
The study further indicates that the rate of bankruptcy is another indicator of the
economy’s well-being.
While conducting some research on bankruptcy in the United States, Warren found
that two-income families were just as vulnerable (and perhaps even moreso) to bankruptcy
1 If Elizabeth Warren was, arguably, the main person involved in the establishment of the
consumer financial protection bureau, then why wasn’t she chosen as the head of the
agency? Instead of Warren, Obama nominated Richard Cordray, previously involved in law
and once attorney general for the state of Ohio. Suzanna Andrews discusses this in her
article published in Vanity Fair: “The Woman Who Knew Too Much”. In spite of Warren
creating the CFPB from the ground up, Obama chose someone less controversial and less
public than Warren in order to avoid more congressional battles over the CFPB.

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as the poor. She called this the “Two-Income Trap” and wrote a book about it with Amelia
Warren Tyagi. The results were surprising and grave, which led Warren to further
advocate for the middle class’s protection from bankruptcy through market regulation. I
have included more information on this in Appendix A.
In A Fighting Chance Warren briefly asserts how financial products need a consumer
safety agency similar to the one that physical products have (i.e. the Consumer Product
Safety Commission). Opponents brought up the same arguments, to which she had
prepared answers. Some of these arguments were also addressed in Sendhil
Mullainathan’s and colleagues’ discussion on behaviorally regulated financial markets,
echoing Warren’s arguments. For instance, opponents against such an agency maintained
that it would hurt banks and put them out of commission. Warren conceded that, yes, it
would hurt some banks, if those banks are engaged in dishonest market practices and
profiting from it. However, those banks that strived to compete honestly would perform
better with the agency (Warren, Fighting Chance, 137). This point is emphasized by both
Warren and Mullainathan; “high road” or reputable banks were being bogged down by “low
road” or dishonest banks. They were performing worse in the markets because they could
not compete against the lower advertised prices offered by the “low road” banks, and so it
became a race to the bottom between firms.
Even worse, customers would have a difficult time distinguishing between the
banks, especially with the terms buried in the fine print. This could change, though,
Warren says. The installation of the consumer safety agency for financial products would
make it easier for the honest banks to sell their products. “Over time, customer confidence

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should improve” [with the increased presence of honest banks in the industry] (Warren
137). In other words, the quality of the product would shine through and better products
would outperform in the market.
While researching Warren I did not come across any examples of her explicitly
stating that she used behavioral economics when forming the brainchild of the Bureau.
However, the attributes of her idea of the bureau are very consistent with the
characteristics mentioned in Barr’s, Thaler’s, and Mullainathan’s essay on behaviorally-
regulated financial institutions. Both mention “high-road” and “low-road” banks; clear,
non-cluttered, honest disclosures; asymmetrical information in the market; and how stress
can make important financial decisions more difficult, leading one to decide on something
that is not the optimum. Although Elizabeth Warren is not exactly a “behavioral economist,”
her ideas are aligned with behavioral economics.
The Behavioral Economics behind the Consumer Financial Protection Bureau
Part of their methods is to employ techniques based on behavioral economics
concepts. The bureau hired Sendhil Mullainathan, a key figure in behavioral economics, as
the part-time assistant director of research when they started up. In one of his research
articles, “Poverty Impedes Cognitive Function” Mullainathan and his colleagues examine
how farmers’ cognitive abilities are affected before and after the harvest. In sum, their
cognitive abilities were worse before the harvest, when they were poorer. Mullainathan
and his colleagues present their research attributing this to their financial state rather than
their normal cognitive abilities. Concerns over their finances before harvest spent some of
the cognitive processes, leaving them unable to give their full mental processing to the

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cognitive tests at hand. Clearly, concerns over finances limit rationality. If a person is in
the process of making an important financial decision about applying for a mortgage or
takin out a loan, then they are obviously already concerned about their finances.
Since the Bureau’s goal is to protect consumers from financial malpractice, part of
their job is to ensure that the consumers do not unwittingly fall into traps posed by
predators, and make sure that the consumers think through their decisions effectively. The
following concepts, as defined by Alain Samson in his behavioral economics guide, are used
to reformat the decision making process of the consumers when considering buying a
financial product or service. Heuristics, or general “rules of thumb” are used in making
decisions when the consumer is limited in information. This would be the case with
“bounded rationality”; rational decisions are limited by time, information, and thinking
capacity (Samson 32). In this case, consumers’ rationality could easily be limited by
emotional duress under financial hardships. Along with that, Samson notes that there’s the
fast (system 1) mode of thinking (36) applied when information is limited, in which the
economic agents employs methods such as heuristics to form their decisions.
Consequently, the consumers do not necessarily make the most beneficial decisions for
themselves in regards to their choices of consumption in the financial market.
In the article "Who Leaves Comedy Central to Work for the Government?" from the
Washington Post, Suzy Khimm examines the format of the Consumer Financial Protection
Bureau, which is centered on intuitive technology and is targeted towards a younger
audience. The article begins by saying that one of Comedy Central’s valuable producers and
website designers was recruited to design a website for the CFPB. She was recruited
because she did phenomenal work on Comedy’s Central’s website, and will hopefully do the

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same for the CFPB. The article goes on to explain how the CFPB’s ultimate goal is to create a
more transparent government, particularly through consumers’ use of technology. The idea
of the CFPB is to give the consumers more power and to create a supportive, financial
consumer community through their website. Ultimately, the website will appeal to
consumers and empower them.
The CFPB’s website is very informative and easy to navigate2. Most importantly, it
seems to be the main venue through which the bureau connects to consumers. Through it
they collect experiences and stories from the consumers. The homepage showcases this
through a video in which Richard Cordray, the director, tells about Rebecca from North
Carolina, whose payments increased after husband’s job loss and missing a mortgage
payment. Since then she has had excessive charges, and the mortgage company is dangling
the possibility of foreclosure over Rebecca’s head unless she pays these fees. Rebecca is a
prime example of the kinds of consumers the bureau is working to reach out to, those who
are victims of the market.
Their website makes them more easily accessible to consumers. To begin with,
under the “Contact Us” page their phone number and mailing address are provided.
Additionally they make a subsection titled “Whistleblowers” to enhance their use of the
consumers’ voices and protect the consumers from legal backlash.
Their “Get Assistance” section of the website houses the educational aspects of the
Bureau. For example, by clicking on the subsection “Ask the CFPB” you can present a
financial product-related question to the bureau which they will post a response to, and
2 In my research I navigated through the website several times and found it useful and easy to use.

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then view the response along with its links to relevant questions and keywords. The “Get
Assistance” section is also divided by borrower categories: “Students”, “Older Americans”,
“Service members and Veterans” and “Community Banks and Credit Unions” which
provides more relevant information for each type of borrower. Above are subsections on
the various situations which would require a financial service or product, like “Paying for
college” and “Owning a Home”. Continuing with their stance on connecting with the
consumers, one can monitor their reported complaint under the “Check the status of a
complaint” section.
A large role that the Bureau undertakes is that of the middle man. One of the main
ways they connect consumers to change is by taking their complaints about various
financial services and products. Then, the bureau sends the complaint, along with relevant
documents, to either the company or a government agency besides themselves that is
better able to tackle the complaint, communicate with the company and receive feedback,
and then relay the information back to the consumers. Afterwards, the bureau reexamines
the issue for their research and enforcement of penalties, and then provides their findings
to Congress and makes some of the data available for other consumers.
The Consumer Financial Protection Bureau
According to the official summary under the Dodd-Frank Act, the CFPB is an
institution independent of the political process, with a budget supplied by the Federal
Reserve System. The following information in this section, describing its goals and
strategies, was obtained from the website of the Consumer Financial Protection Bureau,

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under the “Strategic Plan” section of “Inside the CFPB” (Consumer Financial Protection
Bureau).
The Consumer Financial Protection Bureau is trying to solve six problematic areas
in the financial market: mortgage application process, choosing a credit card, transaction
accounts, loans and borrowing, educational/private student loans, and auto loans. It
examines, supervises, regulates and collects data on both bank (Banks, credit unions,
thrifts, and other affiliates) and non-bank financial services (mortgage lenders, payday
lenders, debt collectors, private education lenders, and consumer reporting markets).
Overall, its goals are to prevent consumer financial harm through regulation, increase
efficiency in lending and borrowing, and to facilitate better financial practices amongst
consumers by increasing their understanding of financial products and services, in order to
reduce the asymmetry of the market.
Four goals are outlined in their plan for reform. Mainly, they strive to eliminate
consumer financial harm and encourage beneficial practices by financial businesses. By
instilling better comprehension among the consumers of the costs, benefits, and risks
associated with financial services and products, the Bureau aims to shift the financial
market towards more equitable decision-making by the consumers. Regulation of
products, services, and their terms, along with business practices will also help to right the
imbalance in the market. Ultimately they want to ensure that consumers are not subject to
“deceptive, unfair, abusive, or discriminatory practices.” Again, they oversee institutions to
ensure they follow federal consumer law, and enforce such laws.

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Another goal is to give more power to the consumers in their financial lives. If the
consumer mistakenly ends up in a less-than-ideal financial situation and files a complaint
through the CFPB website, the bureau then acts as the middleman among borrowers and
lenders and communicates between the consumer and company about the issue and work
to resolve it.
The website of the Bureau notes that the Top 20 complaints as reported by the
Federal Trade Commission’s Consumer Sentinel Network database included 6 financial
products and services: debt collection; banks and lenders; credit protection and repair;
mortgage foreclosure relief and debt management; credit cards; and credit bureaus
(Consumer Finance). By responding to consumers’ concerns they work to establish a better
relationship between the consumers and industry members. Furthermore, gathering
consumer accounts through complaints and inquiries helps the CFPB to identify specific
problems ailing consumers, and track any patterns.
As part of reducing consumer harm, the bureau aims to enable borrowers to be
more financially conscientious. Through understanding the risks, costs, and tradeoffs of
different services and products, the consumers can make better decisions regarding their
loans, mortgages, credit cards, etc. In addressing this, the bureau emphasizes focus on four
particular groups and their different financial obstacles.
Students as a group hold more than $1 trillion in outstanding loans, making it the
next largest share of household debt, with mortgages being the first, cited by the CFPB
website. Their recent total outstanding debt is three times as much as in 2003,
demonstrating their increased need for loans, but also their increased burden.

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Older Americans (62 and older) are vulnerable to exploitation for various reasons.
Decreased cognitive processing abilities, which come naturally with aging, lead to an
increased risk in poor decision-making. Cognitive impairments range from mild to severe
intensity amongst the elderly (including diseases such as Alzheimer’s at the severe end)
and make their long-term planning for retirement and endowment savings more
complicated. Also new forms for retirement, i.e. “do-it-yourself” savings plans puts more
responsibility and decision making on the consumer. Five percent of older Americans have
been victims of financial exploitation by their own family members (“Consumer Financial
Protection Bureau”).
Armed service members form another at-risk group, partly because they often enter
into the military and marry at a young age. Their young age coupled with early-on high
financial obligations increases the complexity of their decision-making. According to the
CFPB website, more than 40% are less than 25 years old, are married and have 2 children
(Consumer Finance). This attracts both trustworthy and predatory lenders because their
security clearance within the military is dependent on their financial position, meaning
they can be more trustworthy to pay back loans. The Bureau further notes that insurance
for armed service members often uses “affinity marketing,” drawing in members through
their marketing appeal to the military which could lead to bias and neglecting to consider
less than ideal products. Not to mention there are several unforeseen expenses from
changing homes, medical injuries, deployments, etc.
The low-income and economically vulnerable are the fourth group which the bureau
focuses on serving. “Economically vulnerable” encompasses those unbanked, underbanked

23. 22
(those with a savings or checking account but who also use nonbank financial services) or
below the poverty line. The CFPB is working on making the financial marketplace more
compatible and serviceable to them so they that do not need to pay high out-of-pocket fees
resulting from lack of a bank account, like processing paychecks. Capturing their attention
at opportune moments, such as when they are looking for quick loans (i.e. payday loans),
providing digital educational materials, and increasing outreach activities targeting specific
groups are some of the strategies in which the Bureau plans on bettering their financial
lives.
Another overarching goal of the bureau is to provide data analysis of consumer
finance markets and consumer behavior in order to make policy-makers (in and out of the
CFPB) and the public more informed through their reports.
Finally, the Consumer Financial Protection Bureau wants to enhance its
performance by maximizing resource productivity. They accomplish this by hiring a
diverse, innovative staff to meet modern challenges, such as connecting with consumers
through the digital divide. They “enable the innovative use of technology for the benefit of
efficient internal processes and effective public engagement” (Consumer Financial) as part
of their strategy for reform, including developing products online for informing consumers
and making data widely available. Ideally, this will help organize data for consumers when
they are shopping for products, and for agency members when conducting research.
Making data available should lead to informed decision-making and innovation by those
accessing data, whether they’re non-profit organizations, individuals, or businesses. It will
also provide a better evaluation of internal operations and compliance. Most importantly,

24. 23
though, bridging the divide between consumers and a federal institution through
technology will create a strong ethos (not just towards the CFPB as a financial agency, but
towards the financial market overall) through its transparency, direct communication with
consumers, and accountability within and outside of the agency.
Enforcement and Successes of the Consumer Financial Protection Bureau
The Bureau regularly administers Supervisory Highlights to help keep businesses in
the financial services industry as well as the public informed about their supervising
procedures, including examination of businesses, concerns they monitor, and amends made
to consumers who fall victim to predatory practices from the financial industry (“Consumer
Financial Protection Bureau”). Overall, the Supervisory Highlights are guidelines for the
financial businesses to keep in mind when making sure they are in compliance with Federal
consumer financial laws.
An integral part of the CFPB’s monitor position is ensuring that the companies’
compliance management systems are thorough. This includes integrating several
components into the compliance management system: training; controls, supervision, and
oversight from internally; recordkeeping; product development and acquisition, etc. Thus,
internal compliance is established and procedures are clearer for employees to better
follow. In addition to internal compliance, the CFPB also addresses the liability of third-
party service providers involved with the supervised institutions, and may hold the
institution accountable for any legal violations by the third party, depending on the
severity of the violation. The Fall 2012 Supervisory Highlights notes that such violations
have occurred from miscommunications between the lender and service provider, leading

25. 24
to differing interest rate information and, consequentially, misapplied penalty rates to the
consumers, directly violating the Truth in Lending Act (TILA) (Supervisory Highlights: Fall
5). Upon preliminary inspection, the bureau also found institutions which did not have
comprehensive fair lending compliance programs, in violation of the Equal Opportunity
Credit Act (ECOA) (Supervisory Highlights: Fall 6). In such cases, the CFPB supervised
implementation of more comprehensive procedures, including directing violating
institutions to expand areas such as their regression analysis on fair lending and
documentation of reports.
The CFPB includes a list of “Significant Violations Detected” when initially
examining some financial institutions for their Fall 2012 Supervisory Highlights issue. For
example, Discover Bank used misleading marketing practices to deceive their customers.
Through telemarketing, customers were wrangled into buying “add-on” products like
“Credit Score Tracker,” advertised as allowing unfettered access to customers to check
their credit scores and reports (Supervisory Highlights: Fall 9). Discover Bank misguided
customers into purchasing one or more of these as well as other programs, unbeknownst to
the consumers, and also did not provide information on some eligibility requirements to
receive benefits.
The CFPB reported Discover’s deceptive practices as violating certain section of the
Dodd Frank Act and also a section of the Federal Trade Commission Act (Supervisory
Highlights: Fall 9). Discover’s penalty included restitution payments to customers who
were charged the products, as well as an additional $14 million towards a civil money
penalty, half of which went to the CFPB’s Civil Penalty Fund. In agreement with the CFPB,

26. 25
Discover would accept remedial actions like improvement/implementation of a risk-based
compliance management system, and adopting different marketing practices which fully
disclosed all information to the consumer (i.e. restrictions, eligibility, benefits). Future
reports on compliance to both the FDIC and CFPB were also required.
The Bureau has prosecuted a variety of groups for various deceptive or unjust
financial practices. Several credit card companies have been penalized for illegal or unfair
billing practices to their consumers. In many of these cases the consumers are unfairly and
unknowingly charged for “add-on products” which the consumers do not receive
(Consumer: Enforcing 2). Some mortgage lenders were prosecuted and penalized for
charging illegal higher rates through discrimination and also through illegal commission
pay to their employees based on charging higher interest rates (Consumer: Enforcing 3).
Beyond mortgage and credit, the bureau has also enforced restitution from the student
loans market and debt settlement corporations. For instance, they charged ITT Educational
Services for forcing the students into unmanageable, high-cost loans and Morgan Drexen
Inc. for charging consumers fees which they could not afford and were not legal
(Consumer: Enforcing 6). It is regulating and enforcing restitutions across the spectrum of
predatory lending, from auto and student loans to debt repayment.
Thus, so far, the Consumer Financial Protection Bureau has already proven to be
successful in certain ways. Its consumer complaint system has proven to be one of its most
successful methods in regulating the industry. From its commencement in March 2013, the
consumer complaint system used by the CFPB took off. In July of that same year, Mitch
Margolis cites it as already having received as many as 120,000 complaints from

27. 26
consumers, and two months later in September Rachel Witkowski cites it as having
received more than 200,000 complaints. On its third anniversary in July 2014, Amy Traub
cites that the Bureau has received more than 400,000 complaints. Recently the system was
updated to allow consumers to publicly and anonymously disclose their full stories on their
grievances with financial products and services, allowing others—including consumers,
academics, competing companies—a more comprehensive look into potential predatory or
abusive practices that have occurred (Traub). The complaint system was formed as an
integral part of the Consumer Financial Protection Bureau, and they are definitely using it
to their advantage.
For instance, it has changed how banks handle their complaints; some banks have
streamlined their own complaint systems in order to avoid customers complaining to the
CFPB (Witkowski). Through the consumer complaint system, the CFPB has been able to
know exactly which problems consumers face and then tailor regulatory actions towards
banks. However, the banks could easily use the same strategy in order to avoid dealing
with the Bureau. When asking some bankers for their opinions Witkowski cites Linda
Verba from TD Bank on how playing the Bureau’s game can work for them: "Are the rules
and regulations a little tighter than people would like? Yeah. Is it because some people got
out control when the rest of us didn't? Yeah… But I firmly believe if you learn the rules of
the game, you can play to win. And you can't change the rules but you can win"
(Witkowski). TD Bank, along with other banks, has since reformatted their complaint
system to avoid run-ins with the bureau, and even go so far as to monitor customer
complaints from social media (Witkowski). Overall, businesses regulated by the Bureau
can be compliant with federal consumer financial laws and compete against each other

28. 27
based on those rules. Or else, if they do not compete fairly and violate regulations, the
CFPB will take actions against them.
Conclusion
As a new institution, the Consumer Financial Protection Bureau is making a name
for itself by transforming the financial market into a much more regulated market. It was
established as a part of Dodd-Frank in response to the financial crisis of 2007-2008 to
reform financial markets. Asymmetrical information within the market favored lenders
over borrowers, and neglected the consumers’ financial wellbeing. The Consumer
Financial Protection Bureau was founded to better regulate and enforce such regulations to
correct this imbalance. The Bureau also works to improve consumer capability within the
market by making information more symmetrical. A better understanding from the
consumer side will enable better decision-making on their part, leading to a more optimal
market. Elizabeth Warren’s ideas on consumer safety along with behavioral economics-
based regulatory methods formed the goals and strategies of the Consumer Financial
Protection Bureau.
The Bureau has clearly demonstrated success so far. Through implemented
regulation and enforcement, they have ceased predatory practices by various institutions
and restitutions were paid to borrowers affected by the institutions’ exploits. A large part
of this effective regulation is the use of behavioral economics to better gauge the decision-
making process of individual market participants and shaping policies with these
considerations in mind. They have worked to change the rules and the scoring of the

29. 28
borrowing and loans aspect of the financial market, and have been able to do so effectively
thus far.
One of their main goals was to connect with the consumers themselves. To do so
they made the agency fairly transparent and easy to access through their website. This
appeals to the new generation of borrowers and aids in educating them on the ins and outs
of borrowing. Also, the Bureau’s consumer complaint database has enabled the Bureau to
resolve problems between individual consumers and financial institutions, which has been
beneficial for all market participants.
While the Consumer Financial Protection Bureau has been successful in reshaping
market participant behavior and enforcing regulations, there are some challenges to its
mission which are worth mentioning. One, the Bureau will continue to run into
confrontations and obstacles put forth by lobbyists and big businesses alike. This could
even result in some legal confrontation. In addition, regulation is costly. It takes a lot of
manpower and a lot of time to keep up and maintain what seem to be ever-increasing
regulations and enforcement actions. Finally, the Bureau must be careful of over-
regulating the industry to avoid stifling innovation and other benefits from some regular
market operation. Overall, though, the Bureau has accomplished a lot, and, in my opinion,
will continue to do so. ▪

30. 29
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"Sendhil Mullainathan." Sendhil Mullainathan. Harvard University, Web. 24 Oct. 2014.
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Gravois, John. "Too Important to Fail: Predatory Lending Still Poses a Systemic Risk to the
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Financial Protection Bureau, 2013. Print. Increase font size
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States; Larry W. Walther, of Arkansas, to Be a Member of the Board of Directors,
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33. 32
Appendix A
Warren’s book The Two Income Trap, co-authored with her daughter Amelia Warren
Tyagi, explores the spiral of middle-class, two-income families into bankruptcy. Previously,
Warren had conducted research in the 1990’s with Jay Westbrook and Terry Sullivan,
investigating bankruptcy and its prevailing causes. When they picked up the research
again in the early 2000’s, they found some disturbing statistics revealing the emerging
frequency of bankruptcy, such as that there would be more women filing for bankruptcy
than graduating college by 2001. The prevalence of bankruptcy was spreading beyond the
lower class and aging population, they found. In fact, it was spreading like a disease among
“solidly middle-class families,” and having a child was the single best indicator of a family
heading towards bankruptcy, Warren asserts (Warren Fighting Chance 69). The fact that
these middle-class families, those living off both of the mom’s and dad’s full-time incomes,
were widely suffering from bankruptcy perplexed Warren, and thus she looked more
deeply into the problem. With her daughter’s help, they sifted through government data on
bankruptcy and consumption habits of such families and wrote the book through the
contrasting perspectives offered by the women from two different generations.
Their book came to astonishing, bleak conclusions. Accounting for inflation, they
found that middle-class families in 2001 spent, on average, less than such families from the
previous generation. Even though the goods of consumption had changed, like purchasing
more in electronics versus earlier families spending more on home furnishings and
upholstery, the spending habits between the families of the two generations were not
significantly different, Warren and her daughter found (Warren, Fighting Chance, 71). The
disparity between the families’ financial situations can be attributed to increasing costs
paired with stagnant wages in the time spanning the generations. More importantly, costs
for more necessary goods, like education and health care, increased substantially (Warren
Fighting Chance 72). In other words, the families of the early 2000’s had less disposable
income compared to those of the preceding generations, including that in which Warren
became a young mother. On top that the deregulation of the banking and financial industry
during that time span made home loans more available for families, leading to the inflation
of the housing bubble. In spite of the moms typically also taking a job in order to better
support the family with two incomes, the increased housing, education, and health costs
largely depleted disposable income.
That is the paradox which is the “two income trap,” coined by Warren and her daughter.
Middle class families supported by two incomes, characteristic of those families in the
generation at the end of the twentieth century and after (i.e. after the 1970’s), were
financially worse-off than comparable families from the previous generation (Warren

34. 33
Fighting Chance 72). Despite the two incomes, the family budget was stretched more
tightly from regular expenditures. In fact, it is reasonable to assume that most middle-class
families of late moved towards two incomes out of necessity, resulting from the ever-
increasing, additional costs and stagnant wages straining budgets. Warren asserts that
budget constraints would most often lead to a zero-rate of savings for these families, and so
the family’s financial balance became precarious more precarious, and one unfortunate
mishap affecting the family-significant medical issues, loss of one parent’s job-could lead to
their financial ruin (Warren Fighting Chance 73). Furthermore, the fixed monthly costs like
mortgage, insurance and tuition payments, along with the lack of a “rainy day fund” left
budgets unaccommodating for such misfortunes. Consequently the family then turns to
credit cards in order to pay off some of the costs. This is in itself was another inescapable
trap, which would lead to further debt.

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Appendix B
There are six divisions of organization within the bureau help to compartmentalize
the tasks of the bureau and to carry out its regulatory role. These six divisions cover roles
relating to internal and external operations, research, regulation, and enforcement.
In order to better understand the financial market, the Research, Markets, and
Regulations Division accomplishes a variety of tasks. Principally, they study consumer
behavior and their interactions within financial markets. More importantly, though, they
evaluate the necessity for regulation within each sector of the financial market, and
perform a cost-benefit analysis on potential and existing regulation.
The legal division ensures legal compliance from industries and provides legal
advice to businesses under regulations.
Supervision, Enforcement, and Fair Lending monitor market participants and
enforce laws when necessary. As part of its enforcement the bureau has its own judicial
office, the Office of Administrative Adjudication, which assigns charges and remedial
actions introduced by the CFPB, in regards to financial crimes. It works alongside the
Department of Justice of the United States in order to ensure compliance with federal
consumer law and penalize violators (Justice Department).
External Affairs works to improve transparency, accountability and understanding
of financial products and services. It handles the relationship between stakeholders and
the bureau in an effort to avoid miscommunications.
A key goal of the Bureau is to make information in the financial market less
asymmetrical, and thus the division of Consumer Education and Engagement provides
information to consumers to better their understanding of financial products and services.
This is accomplished through targeting groups facing challenges, such as Older Americans
and students.
Finally, the Operations division maintains the agency’s operational framework,
ranging from website maintenance to dealing with consumer inquiries and complaints to
bureau. As one of the main features of the bureau, its consumer complaint management
system helps the agency connect directly to problems it is trying to solve. It acts as the
middleman between financial institutions and consumers; the bureau receives a complaint
from a consumer via their website, they forward it along with any relevant documents to
the company or business, and communicate with the company to work out an optimal
resolution between the consumer and the business.

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Naturally, the bureau’s involvement in a variety of financial industries requires
insight into each industry in order to better shape regulation. Four advisory boards
provide council to the bureau on these aspects.
The Credit Union Advisory Council and the Community Bank Advisory Council
provide advice from the perspective of their respective areas, which aids the Bureau in
creating policy as well as in better engaging themselves with the industries.
A Consumer Advisory Board made up of the consumer community, with a diverse
representation of people ranging from industry representatives, consumer advocates, and
community leaders, keeps the Bureau connected. Members of the Board brief them on
emerging practices and trends, products and services and advise it on potential impacts
within their respective communities.
As part of educating the public and businesses with updates in legal rulings and
regulation updates, the CFPB formed an Academic Research Council composed of members
from various universities. Their job to research financial market services and products as
well as consumer behavior and awareness forms the basis for the Bureau’s decisions in
which areas need regulation. After analyzing their findings they send reports to the CFPB’s
policy and operations sectors. The Council also fills a secondary role by advising
permanent researchers in the bureau on the research process (i.e. collecting data,
methodologies, and analytic strategies). Through the council’s advice, the bureau can better
form their strategic plan toward achieving their goals.