The downside of scaling back the CFPB complaint database

For U.S. financial institutions, a searchable government database that holds 1.2 million consumer complaints has mostly been a source of irritation.

Banks and other lenders say they can be unfairly maligned by consumers whose grievances that have not been vetted for accuracy. Industry groups also chafe at how the Consumer Financial Protection Bureau cites numbers from the database without some of the relevant context.

But if the CFPB database gets pulled behind a veil, as both House Republicans and the Trump administration are proposing, the consumer finance industry will encounter a little-discussed downside: companies regulated by the CFPB have become users of the database, and they will no longer have access to the insights it provides.

Banks and other consumer lenders analyze the data to assess how their own risk of getting hit by regulators stacks up with their competitors, according to industry watchers. They also use it to assess potential market opportunities, areas where they can provide a better customer experience than their competitors.

“Banks currently are trying to make lemonade out of lemons,” said Kate Larson, director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

In a deft act of jujitsu, some companies have even cited the CFPB’s own data to argue that the agency is focusing on the wrong targets. For example, payday lenders, which have been facing the threat of tough new CFPB regulation, frequently cite the database as evidence that the agency’s priorities are skewed. Last year, roughly 2% of all consumer complaints involved payday loans. The payday industry highlights that data to argue that the CFPB is targeting it for political reasons.

None of this should suggest that banks and other firms regulated by the CFPB believe that the benefits of the searchable database outweigh the costs. By and large, industry representatives are calling for the database to be removed from public view.

“By making it public, they’re creating problems rather than solving them,” said Steve Zeisel, executive vice president and general counsel at the Consumer Bankers Association.

Under legislation passed earlier this month by the House, and supported by Treasury Department recommendations, the industry would get its wish.

Although the database would no longer be searchable, the consumer agency would continue to collect consumer complaints. And it could still use those complaints to help determine its enforcement priorities.

Lenders would still be made aware of the complaints lodged against their own institutions, but they would not have visibility into the data that the agency is collecting about their competitors.

Those changes would carry a cost for consumer lenders, argued Steven Ramirez, the CEO of Beyond the Arc, a data analytics firm that has published reports about the database.

“Banks have largely learned to incorporate that CFPB data into their complaint-management process,” Ramirez said. “They’ve kind of adapted.”

Banks use the vast trove of complaints as a guide to where the CFPB is likely to strike next, according to Ramirez. The agency has long said that it uses consumer complaints to spot patterns and identify problems that deserve scrutiny.

So after the Wells Fargo fraudulent account scandal emerged last September, industry analysts turned to the CFPB database in an effort to determine whether other banks were likely to encounter similar regulatory problems.

“We believe this data will give the CFPB their first look into which banks may or may not be more aggressive with selling certain products,” analysts at Piper Jaffray wrote in a September 2016 research note.

The CFPB’s main argument for the public-facing database is that it helps hold lenders accountable. But Director Richard Cordray has also raved about the insights that lenders can glean from the data.

“Industry can see direct feedback from customers, and review complaints made about others in the same markets,” he said in a May 31 speech. “This helps them fix current problems, keep small problems from becoming bigger problems, and prevent future problems.”