April 17, 2013 – The new U.S. consumer finance watchdog is gearing up to monitor how millions of Americans use credit cards, take out mortgages and overdraw their checking accounts. Their bankers aren’t happy about it.
The Consumer Financial Protection Bureau is demanding records from the banks and is buying anonymous information about at least 10 million consumers from companies including Experian Plc.
While the goal is to sharpen enforcement and rule-making, banking executives have questioned why the bureau is collecting so much without being more specific about the benefits.
“Do they need the reams and reams and reams of data we’re having to provide to them?” Susan Faulkner, senior vice president at Bank of America Corp., asked at a banking conference in March. “Don’t we have to find a healthier balance here?”
Director Richard Cordray has said that the consumer bureau needs raw material to make “data-driven” decisions based on how financial products and services are used or abused. Research will improve regulation as well as the marketplace, he said.
“The more information there is, the more innovation there can be and the more competition there is among the institutions around customer service,” Cordray told consumer groups last year. “It’s something we want to encourage.”
The agency’s approach dovetails with a trend toward data analytics, often dubbed “Big Data,” by firms such as Amazon, Google, IBM and General Electric. Those companies are mining massive pools of information for insight into areas including consumer behavior, manufacturing, dairy farming and genetics.
The consumer bureau, created by the Dodd-Frank law of 2010, consolidates and expands U.S. oversight of consumer finance. It supervises banks with assets over $10 billion, including JPMorgan Chase & Co. and Wells Fargo & Co. as well as payday lenders, mortgage originators, debt collectors and credit bureaus.
Dodd-Frank specifically bars the agency from collecting data “for purposes of gathering or analyzing the personally identifiable financial information of consumers.”
Sendhil Mullainathan, the consumer bureau’s assistant director for research, said the agency is committed to protecting the privacy of consumer information and doesn’t collect personally identifiable data such as Social Security numbers. He described himself as “very sympathetic” to the reaction some consumers might have to massive data repositories.
“I understand that people don’t want firms doing it, so why would you want the government doing it?” he said. “It seems invasive.”
Bureau researchers are assembling data from across the financial landscape, according to a review of government records. Credit-card information from nine banks will be stored and analyzed by Argus Information & Advisory Services LLC, a White Plains, New York-based consultancy that won a $15 million contract for the work, procurement documents show. The documents don’t name the nine banks.
As part of a separate industry-wide review, banks are being ordered to provide records of credit-card add-on products including credit monitoring and debt cancellation, according to two people briefed on the matter. And last year, the bureau persuaded banks to submit data on checking-account overdrafts.
The consumer bureau is buying other records from outside the banking industry. Experian, the Dublin-based credit-monitoring company, will be paid up to $8.4 million to provide data on 5 million to 10 million consumers “for use in a wide range of policy research projects,” according to contract documents. The agency also plans to buy auto-loan information from Experian.
Clarity Services Inc., a Clearwater, Florida-based credit reporting agency, will earn $443,260 for providing data on short-term credit known as payday loans, the documents show.
Together with the Federal Housing Finance Agency, the consumer bureau is also building a mortgage database that will integrate consumer credit information with loan and property records. CoreLogic Inc., an Irvine, California-based provider of financial and property information, will be paid about $796,000 for loan-level data on mortgages, procurement records show.
“It’s credible to say that within the next year, CFPB will be the best place for consumer finance data,” Mullainathan said in an interview. “Anybody who wants to do research on consumer finance will want to be there.”
Mullainathan, who is also a professor of economics at Harvard University, said that the consumer bureau should play the kind of role in consumer finance that the Federal Reserve does in macroeconomics, continuously collecting unemployment data so analysts can dive deeper into the subject at any time.
Cordray has said the bureau hopes to publish its data to promote research outside the agency. He noted that the financial industry reacted with a “certain amount of criticism and a fair amount of resistance” to publication of the consumer-complaint database, which was expanded and posted on the bureau’s website in March.
“To the extent the public can help us do our work, that’s a good thing,” he said in July. “If it helps us to have this information, I’m assuming it would help the public as well.”
Joan Claybrook, a former head of the National Highway Traffic Safety Administration, lauded the consumer bureau’s approach. She compared it to the transport agency’s early- warning database on auto safety defects that may have contributed to fatalities. The agency also conducts random sampling to look for patterns in the data, she said.
“It’s useful to have a broad, basic database so you can evaluate new problems quickly,” Claybrook said in an interview.
Bankers say that the information-gathering by the consumer agency is a vexing new regulatory burden. Banking lobbyists opposed the creation of the agency in Dodd-Frank, saying it would add a layer of unnecessary bureaucracy to U.S. regulation and impose rules that would restrict choices for consumers.
The remarks by Bank of America’s Faulkner, made on March 12, drew murmurs of approval from the hundreds of bankers gathered at a conference of the Consumer Bankers Association in Phoenix that day.
The U.S. Chamber of Commerce, in a Feb. 14 letter to Cordray, said the bureau’s data requests have been “often unfocused, overly inclusive and not coordinated with other regulators.” The bureau is misusing the regularly scheduled examinations of banks to “demand huge amounts of data,” requests that instead should be made by rule or order, said the letter from David Hirschmann, head of the chamber’s Center for Capital Markets Competitiveness.
The center doesn’t disclose its membership. The letter reflects the concerns of big banks who are members, according to a person briefed on the discussions. JPMorgan spokesman Paul Hartwick and Wells Fargo spokeswoman Richele Messick declined to comment about the data request.
The consumer bureau’s procedures depart from those typically used by the Office of the Comptroller of the Currency or the Federal Deposit Insurance Corp., which previously conducted consumer finance examinations at larger banks, according to two people briefed on its work.
While those agencies seldom deviated from their scheduled examinations, the consumer bureau’s supervisors have demanded data from multiple banks when they find a potential consumer- protection issue at a single institution, two people briefed on its work said.
Richard Riese, senior vice president in the Center for Regulatory Compliance at the American Bankers Association, said it’s “a very laborious exercise” for banks to meet some of the data requests. Still, he said, the bureau’s examiners are new to the field and over time will learn to be more focused.
“I think both sides will evolve in this process and we’ll get to some efficiencies,” Riese said in an interview.
Raj Date, the bureau’s former deputy director, said that public analyses of data could lead lenders to innovate in ways that could cut the costs of services including checking accounts. That’s a better potential outcome than what usually results from traditional rulemaking, he said.
“The danger is that regulation is inherently conservative -- it creates inertia in the marketplace,” Date said in an e- mail. “By being tough-minded and data-driven, you can avoid getting anchored to the parochialism of the products and practices of bygone eras.”
Mullainathan said the data repository could be used for a variety of purposes. For example, he said, data on how often consumers renew their payday loans could help in developing policies about the industry. Credit-card records could help the bureau measure the impact of its rules.
“This does not mean just touting successes but actually learning from mistakes quickly,” Mullainathan said.
David Jacobs, consumer protection counsel at the Electronic Privacy Information Center, said that by aggregating information it collects or buys, the bureau complies with federal privacy laws. It will have to ensure that data it releases doesn’t add up to a fuller picture.
“Any agency compiling massive amounts of data has to consider that you can use bits that are not personally identifiable and put them together,” Jacobs said in an interview.
Mullainathan said researchers have no interest in specific individuals.
“No researcher needs to know about any one person,” he said. “Just the opposite. They need to know about thousands of people.”
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