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Mercatus: CFPB shouldn’t create open consumer-complaint database

Info would be unfair, inaccurate, costly and without statutory authority

Open publication of the Consumer Financial Protection Bureau’s consumer complaint narrative database is unfair, unlawful, prohibitively expensive and distracts the bureau from its actual mission.

That is the conclusion of Senior Research Fellow Hester Peirce and Research Assistant Vera Soliman at the Mercatus Center at George Mason University, who detail the problems in an open letter to the CFPB.

(The full text of the letter can be read here.) And HousingWire has covered a number of problems with the program in news articles and op-eds.

The Mercatus authors claim the problem is the complaints the CFPB wants to publish on their site will not have been vetted, investigated or adjudicated.

For instance, eight out of 10 mortgage complaints – when the CFPB investigates them – are tossed out. The CFPB received 163,700 consumer complaints in 2013, nearly double the total 90,000 they received in 2012. Of that, 59,900 are mortgage related.

Of all mortgage complaints, 77% are closed with a simple explanation or clarification to the consumer, without relief of any sort.

That means four out of every five complaints get closed with an explanation, or dismissed without even bothering with an explanation, much less relief to the consumer complainant.

“In its current consumer complaint program, the Bureau invites consumers who ‘have an issue with a financial product or service’ to make complaints,” they write. “The Bureau publishes the complaints in a publicly accessible consumer complaint database. Other than verifying that the customer has a relationship with the company that is the subject of the complaint, the Bureau makes no attempt to assess the veracity of the facts, let alone whether the financial institution named in the complaint has violated a law.”

The database currently includes basic information about the complaint and its resolution. The CFPB proposes to expand the existing database to include unverified consumer narratives and company responses. The CFPB will scrub complaints and responses of information that could identify the consumer.

Soliman and Peirce argue that there is not a market failure that would justify the public database. They identify the costs to the consumers whom the database will mislead; the financial service providers whose reputations the database will tarnish; and the CFPB, which will have to incur great expense to prevent the database from undermining its mission of protecting consumers.

The two also raise concerns about the lack of statutory authority to expand the database and its incompatibility with open government directives.

For starters, the CFPB has not identified a problem that requires a regulatory solution.

“The Bureau contends that, absent publication of complaint narratives, it cannot meet the needs of consumers ‘who may choose to file a complaint only if they will have the opportunity to share their story and other consumers who may overcome their reticence to submit a complaint by reading the experiences of others,’” they write. “There may be a powerful consumer demand for sharing bad experiences, but a private complaint database provider can more effectively satisfy that demand. Such databases already exist for many products and services.”

As HousingWire has done, they point to services like Yelp and Amazon.com that collect and publish feedback on numerous consumer products and services. These companies, mindful of their own commercial interests, foster the provision of helpful and accurate content.

“Unlike the Bureau’s website, these companies include both positive and negative comments. As a result, these sites contain more balanced and complete information for consumers than a government website designed solely to collect complaints,” they write in their open letter.

The existence of Yelp, Amazon and many other similar private websites suggests that there is no need for the government to run its own complaint publication website.

They point out that private comment databases have a commercial incentive to develop ways to signal the relative trustworthiness of reviewers, to encourage accurate reviews, and to ensure that the mix of reviews is representative of consumers’ actual experiences. The CFPB does not propose to take comparable steps to ensure the quality of its database and would likely be reluctant to do so for fear of appearing to take the concerns of some consumers more seriously than others.

Aside from the CFPB’s proposal being a solution to a problem that doesn't exist, there is the issue of financial costs.

“The public consumer complaint database is not only unnecessary, but costly. Expanding the database to include customer narratives only adds to the expense. Consumers, providers of financial products and services, and the Bureau will incur costs if the database is expanded as proposed,” the two write.

The proposal is also harmful to consumers.

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“In its current form, the database presents a skewed picture for consumers. Consumers see all complaints, regardless of their veracity, merit, or legal significance. Adding narrative information—which will likely be more interesting to read than the basic information in the current database—would make it even more?likely that consumers will look at and rely on the database in making decisions. By publishing a database of unverified, redacted (to remove personally identifiable information) consumer complaints, the CFPB would entice consumers to rely on incomplete and potentially inaccurate information—exactly the type of practice the Bureau seeks to stop financial firms from engaging in,” they note.

“Devoid of context, every complaint will carry equal weight, regardless of the facts and circumstances and the complainant’s motivation. Because of their location in a government database, the complaints will carry an air of official gravity. The page on which the complaints are displayed does not display a disclaimer that they are not verified,” they write.

They argue that consumers may find it difficult to distinguish valid complaints from expressions of temporary frustration, unwarranted grievances, anger over being denied credit, or intentional efforts to cause reputational damage to a financial services provider.

“There is no way to discern whether a complaint involves a violation of federal law. The database will not contain metrics to allow customers to compare the number of complaints to the size of the institution and its activities in a particular market, so database users will be able to draw few useful inferences,” they note.

The idea that the database content will be balanced out by there being an “open marketplace of ideas” is false, they argue, because the CFPB’s database collects only complaints, and it is therefore an intentionally one-sided marketplace.

“Even for companies with many satisfied customers, positive comments will not be included in the database to offset negative comments. Consumers, relying on the database as a relevant input in their financial decision-making, will not get an accurate picture,” they note.

Worse, they say, financial institutions, unable to effectively counteract or provide context for complaints, could suffer severe reputational harm. The database may be most damaging to small financial institutions for which a single baseless complaint would likely constitute a larger percentage of the total mix of available information.

Creating and maintaining the database will also cause the CFPB to incur unnecessary costs.

“First, the direct costs of maintaining a database and verifying the relationship between the complainant and the financial institution are substantial. Second, as the Bureau notes, ‘the potential harm associated with the possible reidentification of actual consumers’ is a ‘principal risk of publishing narratives,’” they say.

Basically, to adequately guard against this risk, the CFPB likely will have to expend considerable resources scrubbing complaints and company responses of personally identifiable information.

“Third, the Bureau is also likely to have to expend substantial resources responding to financial institutions about complaints they believe to be misleading. Publishing inaccurate information about financial institutions may expose the Bureau to litigation risk and associated expense,” they write. “Fourth, if the Bureau were to screen out baseless complaints in order to make the database less misleading, the costs of running the database would be even higher. Fifth, the Bureau’s costs are likely to rise as consumers look to the Bureau to intervene in complaints they would otherwise have addressed directly with the company at issue.”

But the biggest financial issue may be that the public database will impair the CFPB’s ability to carry out its mission effectively.

After all, if the CFPB’s mission is to implement and enforce financial laws for the purpose of “ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive” as the CFPB’s statement contends, then “publishing unverified complaints is detrimental to fairness, transparency,?and competitiveness and is unseemly for a purportedly data-driven agency. Market fairness is undermined if consumers avoid products and services that would meet their needs in response to information they assume to be true because they find it in a government database. Publishing potentially inaccurate information impedes market transparency by adding potentially inaccurate complaint data to the mix of available information. A database filled with a mixture of meritorious and meritless complaints interferes with the competitive forces that should shape markets.”

They also note a problem many in the financial lending world are already encountering – consumer fears egged on by misinformation.

“The database may also scare consumers away from legitimate financial products and services by fostering unwarranted fears about financial institutions and the quality of their products?and services,” they write.

And not that it’s ever stopped a government body from overreaching, but there is the issue of a lack of any statutory or Congressional authority to undertake expanding the public database to include consumer complaint narratives.

“Despite the Bureau’s contentions to the contrary, it is also inconsistent with open government directives. The other government databases that the Bureau cites as parallels to its own are not appropriate models for the Bureau to follow,” they note. “The Bureau cites several statutory provisions in support of the proposed database expansion. These include the Bureau’s ability to establish general policies with respect to executive and administrative functions,  its obligation to report to Congress about the complaints it receives,  and its authority to make public—in aggregated or other appropriate formats—information it collects in monitoring the markets.  None of these provisions authorizes the Bureau to establish a publicly accessible complaint database.”

The two conclude in their letter that rather than expanding the database’s potential to cause unintended harm, the CFPB should return to the drawing board.

“Once back at the drawing board, the Bureau should analyze whether there is a market failure, whether the Bureau is well suited to solve that market failure, whether Congress has given the Bureau the authority to create a public complaint database, and the potential costs and benefits of creating a responsible (i.e., not misleading) public complaint database,” they write.

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