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How the CFPB is Spurring Banks to Self-Regulate

David Callahan

The standard rap against regulation is that government uses a meat cleaver to clean up problems in the private sector that are better tackled with more nuance. 

Yet regulation—or the threat of it—often serves to spur smart self-regulation that wouldn't otherwise occur. You want to see a scalpel at work? Wave around a meat cleaver. 

A case in point is how banks are getting more serious about addressing consumer complaints now that the Consumer Financial Protection Bureau has created a database of complaints about banks and other financial institutions. 

Some 200,000 complaints have been lodged in the CFPB's complaint database since it was created in March—a staggering number that testifies to the extent of abuses in the financial sector. CFPB officials are using this information to figure out where to focus enforcement resources and strengthen regulation. 

If you're a bank, you don't want to be generating red flags in the database. Instead, you want to get to irate customers first, before they go to the CFPB, and address their complaints. According to the American Banker:

Some larger banks like TD Bank (TD) in Cherry Hill, N.J. are already putting that into practice by encouraging consumer feedback through multiple channels and having all complaints fed to a so-called "chairman's service center" to be monitored for trends and resolutions. The bank is also running product materials and written communication through consumer-friendly testing in addition to making sure it's compliant with laws.

More banks are expected to follow suit, and the entire industry may ultimately revamp how it deals with consumers, according to the American Banker

This is a great example of government giving the private sector a strong nudge, and then letting business do the rest. The CFPB didn't hand down some elaborate rule dictating in detail how banks must respond to consumer complaints. Instead, it simply created its own database of complaints and, behold, the banking industry took actions it should have taken long ago. 

Let's hope that something similar happens with credit reporting companies, which have rightly come under fire lately for all the errors in their credit records and their terrible record of responding to people desperately trying to repair their credit. 

Government regulators may well come down hard on credit reporting companies in the not-so-distant future and make them change. But wouldn't it be better if those companies saw the handwriting on the wall and cleaned up their own act?