If the Consumer Financial Protection Bureau disappeared tomorrow, would anyone notice?

What is expected to be a contentious Senate Banking Committee confirmation hearing Tuesday for Rich Cordray, who has been temporarily leading the bureau, offers an opportunity to examine the need for a federal agency designed to protect consumers in their financial dealings. If confirmed, Cordray gets a five-year term, but he’s certain to face a major fight from Republicans, who say the bureau is ill-conceived. We spoke to one of the agency's biggest supporters and perhaps its fiercest opponent to get some perspective. But first, a little background:

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Born out of the financial crisis, the first new federal consumer protection agency since the Depression, the CFPB has had a rocky start. Republicans railed against the idea but couldn't stop Democrats from passing the financial reform legislation that created it, so instead they blocked appointment of Cordray in 2011, effectively putting the bureau into limbo. President Barack Obama then used a recess appointment to seat Cordray, setting off a battle that is still going on.

The political dispute didn't stop the bureau from shooting out the gate, however. It its 15 months of existence, it has written a host of new rules for lenders, set up a huge public database of consumer complaints and generally irritated most of the financial industry.

Many in the banking industry are still hopeful they can dismantle the CFPB, unseat Cordray and potentially undo everything the bureau has accomplished with a single court victory.

A federal court ruling in January found that another recess appointment by Obama was improper, creating the possibility that it might agree with Republicans who argue Cordray’s recess appointment was illegitimate, too. Some opponents argue that would make everything the bureau has done since his appointment void.

Expect bickering

That legal battle is still in the future, but Tuesday's confirmation hearing serves as a proxy for the fight and another chance for political posturing by both sides. There will be plenty of "Your regulations are killing jobs" vs. "Do you want a repeat of the 2008 recession?" bickering.

The discussion has potential to be a little more elevated, however, as this time the CFPB has a track record to examine.  As far as federal agencies go, it's just  a baby. But as long as we're fighting about it, it’s worth asking what the CFPB has done to prove its worth. 

In one corner ...

Todd J. Zywicki, a law professor at George Mason University with expertise in bankruptcy and contracts, says the CFPB has become exactly the monster he predicted three years ago when Congress debated its creation.

"It's turned out to be an extremely political agency,” he said. “... It's turned out to be really aggressive and arrogant in the way it behaves.”

When one of Obama’s recess appointments was invalidated, the agency response was "typical,” he said.

"They said that ruling doesn't apply to us,” Zywicki said. “What that shows is an agency that is very arrogant and out of control.”

The CFPB has unusual power among federal agencies. Unlike the Federal Trade Commission, the Federal Communications Commission and other agencies which are run by members of a commission with mixed political affiliations, the CFPB has a single agency head. It also does not have to submit its annual budget for congressional review the way other regulators must.

"They've created an unaccountable super-regulator that can and has acted as a highly political agency," Zywicki said. "If the CFPB were to go away tomorrow, it would be a boon for consumers and the economy."

Zywicki's most specific concern about the agency before its creation was that it would hurt lenders, and therefore hurt  consumers who were trying to borrow money. That has happened, he said.

"Our concern from the beginning was that it would act in a manner that would restrict credit and hurt the economy," he said. "Look at its rules on qualifying for mortgages (which impose stricter requirements on borrowers). ... It's stifling innovation (by banks) and restricting consumer choices."

He also said that the agency's new rules are disproportionately impacting the nation's smaller banks, which have smaller legal staffs to deal with them.  

"Because of the massive regulatory burden it is imposing on the economy, (the agency) is promoting a consolidation of the banking industry" by burdening small banks, Zywicki said. He could not point to a bank that closed or was sold because of CFPB rules but said that smaller community banks across the country are consistently complaining about the rules.  "It's the overall effect of regulations," he said. "It's not just the CFPB, but it is piling on."

And in the other ...

Taking the opposing view is Ed Mierzwinski, consumer program director for the consumer advocacy agency Public Interest Research Group and a vocal supporter of the CFPB creation and of Cordray. He gives the agency an "A-minus" for its work so far and has no trouble rattling off a list of accomplishments in its short life. Among them, he said, the bureau has:

• Successfully brought enforcement cases against three large credit card issuers for allegedly unfairly "upselling" products such as credit card insurance, and returned $400 million to 6 million U.S. consumers after a settlement.
• Created new mortgage disclosure documents, promoted awareness among college students about school loan debt and launched a separate effort to protect soldiers and veterans from predatory lenders, all through its “Know Before You Owe” program.
• Become the first federal agency to supervise so-called “non-bank banks” and begun to focus on products such as payday loans, title loans and other non-traditional borrowing products, as well as private student lenders.
• Worked to increase transparency, including creation of a public disclosure website that lists consumer complaints and, unlike similar databases at other agencies, allows anyone to browse the complaints, including information on the companies targeted.  Agencies such as the Federal Trade Commission do not make complaints pubic.

"The CFPB data allows (observers) to rank the companies involved. No one wants to be No. 1 on that list," Mierzwinski said. Public shaming is an effective regulatory tool, he argued, one that hasn't been used by other agencies.

When asked about the theoretical possibility that the agency could disappear, Mierzwinski said consumers would lose the benefit of actions he expects in the next 15 months, specifically related to the CFPB's recently acquired new power to regulate credit bureaus and debt collectors.

"The FTC never had the tools to go after them,” he said. “... Now for the first time, a federal agency can go into the credit bureaus and debt collectors and say, 'Show me your books.'"

Mierzwinski said the FTC has never held the credit bureaus financially accountable for credit report errors and predicted CFPB enforcement would lead to more accurate credit reports.

In a more general way, he says enforcement actions and additional regulatory oversight help all consumers, even if they haven't received a refund check based on a bureau lawsuit.

"I'm convinced that many banks eliminated those kinds of practices," such as selling credit card insurance, after a CFPB lawsuit,” he said.  "So going forward, you will see fewer unfair offers from banks. ... If you have a mortgage, going forward your servicing rules will be fairer."

Mierzwinski’s chief argument for preserving the CFPB: All other banking regulators are charged with simultaneously protecting the safety and soundness of banks on one hand, while mandating fairness to consumers on the other. That's why, for example, excessive overdraft fees were allowed for years -- when regulators weighed the interests of making banks profitable against treating consumers fairly, they often chose the former. 

"They had a conflict of interest ... and often sided with bank safety over consumer protection," Mierzwinski said.

Zywicki, the CFPB critic, said he isn't fundamentally opposed to a consumer protection agency focused on financial products, but he says he believes evidence shows that Cordray's agency is acting recklessly.

"They made a political decision that the entire financial crisis was a consumer protection problem, ignoring evidence that there were other causes," he said. "I see no indication to date that they have a serious understanding of economics or unintended consequences. Sure, there are concerns about these products. People misuse mortgages. But their behavior to date raises questions about how seriously they take economic evidence."

He disagreed that payday and other non-traditional lenders had slipped through regulatory cracks before creation of the CFPB -- they were regulated at the state level, he noted. And even in this area, he said he was concerned about the new agency's actions against high-interest lenders. 

"The concern is the same, that they will blunder based on their belief in what's going on, rather than use sound economic science,” he said. “By over-regulating those products, they could drive them out of business and could end up hurting consumers. ... Before we had alternative lending products ... we had loan sharking. We could end up there again."

It works, or it doesn't

While Zywicki wouldn't mind a dismantling of the agency, his preference would be a radical restructuring, with Corday replaced by a slate of mixed-party commissioners with less power.

"The optimal solution is a more accountable, more reasonably constructed agency along the lines of the FTC," he said. "We've been doing independent regulatory agencies for a century, and we know what works."

But Mierzwinski said the housing bubble and the recession show that the system that was in place didn't work, and says he fears that a diluted CFPB wouldn’t be able to take firm action against the powerful financial services industry.

"We would lose … the one regulator that has protecting consumers as its only job," he said. "Payday lenders could run roughshod over American consumers again without the CFPB, and credit bureaus wouldn't be brought into line."

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CEO of Irish airline Ryanair Michael O'Leary poses on a model jet at a press conference in Madrid on Aug. 23.

Finally, an honest CEO.

Ryanair head Michael O'Leary called his customers "idiots" this week. The chief of the deep-discount, “gotcha”-dependent airline might be the first to say it, but he's hardly the first to think it.

O'Leary was speaking specifically about fliers who fail to print their boarding passes before they arrive at the airport, and are forced to pay Ryanair's 60-euro fee. The issue came to a head after a mom paid about $380 so her family could get the paperwork to fly home from Spain to Britain. She aired her concerns on Facebook and got hundreds of thousands of "likes." O'Leary responded to the controversy as many CEOs would after being administered a truth serum.

"We think Mrs. McLeod should pay 60 euros for being so stupid," he reportedly told The Telegraph before piling on the sarcasm. "She wasn't able to print her boarding card because, as you know, there are no Internet cafes in Alicante, no hotels where they could print them out for you, and you couldn't get to a fax machine so some friend at home can print them and fax them to you."

Even with a day or so to reflect, O'Leary only slightly changed his tune, arguing in the Irish Independent that his comments weren't aimed at the mom, specifically, but at his customers generally.

"I was not calling her stupid, but all those passengers are stupid who think we will change our policies or our fees," he said.

Ryanair occupies an important post in the gotcha world, having invented a-la-carte (i.e., sneaky) airline prices through bag fees, exit row seat fees, and has even threatened to impose potty fees. O'Leary is a trend-setter. Perhaps he'll start a trend for greater honesty, too.

'Stupidity fee'
He does have his defenders. While most of the Internet reacted in horror at the idea of a family paying $380 for 5 slips of paper valued at 5 cents, a certain set of consumers believes quite firmly in the concept of a "stupidity fee."

"I think it's about time an executive comes out and defends his policies," wrote one on my Facebook page. "It was in black & white, I don't know why the person was complaining."

In other words, companies can do whatever they wish, as long as it's disclosed. That's absurd, of course. In a famous April Fool's Day joke two years ago (and oft repeated), British firm GameStation got 7,500 members to agree to fine-print terms of service that included the phrase, "You agree to grant us a non-transferable option to claim, for now and forever more, your immortal soul."

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Still, many people believe in the Tricks and Traps economy, which works like this: Discount retailers slash prices -- even below costs -- and coupon-clipping, rules-following, rebate-form expert consumers benefit. How is this possible? These bargain hunters and their $5 flights are subsidized by another set of consumers who screw up often and must overpay through tack-on fees and penalties. For years, the credit card market worked this way. Some consumers got thousands of frequent-flier miles, leading to free trips, while others paid their bills late and subsidized these perks through late fees. 

In a landmark economics paper on this issue, two professors dubbed these winners and losers "sophisticates" and "myopes." Smart consumers --  the sophisticates -- should thank their lucky stars every day that clumsy myopes exist; otherwise, there would be no $5 flights from London to Dublin.

'Gotcha economy'
I hope you can see where this ends badly. When all companies' profits come from fees, they only survive by getting very good at handing out such punishments. They are incented not to provide good products, services or even prices -- only to be better and better at sneaky fees. This is something I call the "Gotcha economy." It is very far from a free market economy, which requires price transparency and rewards innovation. The Gotcha Economy rewards cheating.

It also rewards absurdity, which is how we end up with $380 fees for boarding passes. Another inevitable element of the Gotcha economy is that the punishments don't fit the crimes. Sure, it's fine to charge something for boarding passes (well, not in Spain, where a judge has ruled that it's the airline's responsibility to issue them). But the charge should bear some resemblance to the business cost of creating them. Again, a customer racing to arrive at the airport is not in a free market situation -- he or she can no longer bargain over boarding pass printing costs. This is what is sometimes called the "captive consumer" problem.

But take basic economics out of this situation, and there is a much larger problem that needs addressing. The entire concept of a stupidity fee is bogus; even Thomas Jefferson would agree with that.

If someone dropped $50 on the street, would it be OK to keep it? They were stupid for dropping it, weren't they? If you give a clerk a $20 but think it's a $10 when buying milk, is it OK for the store to keep the extra $10 because you were stupid?

No. When someone makes a mistake, they don't automatically surrender their right to fairness and justice under the law.

Recently, I was on a United Airlines flight when the pilot tried to forcefully close the cabin door, and the emergency water slide accidentally deployed. We were delayed for four hours. Think I was able to charge United a $150 change fee? What would have happened to me if I was four hours late to the airport? Stupidity taxes aren't fair because they are always one-sided. Only large corporations in dominant market positions can offer such take-it-or-leave-it terms and conditions. Even if you have no sympathy for a mom trying to get her kids to the airport, it's hard to deny that there's nothing free market about one-sided deals like that.

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A screen capture of Progressive's automated responses that set the social media world on fire.

In the ugly battle of Web users vs. insurance companies, a lot of blood was spilled this week.

We've known for a while that hell hath no fury like an Internet user scorned. But at the intersection of social media, consumer frustration, anxious lawyers and heavy-handed regulations you'll find a particularly tricky corner of the Web. Insurance firms, which have always been a magnet for complaints anyway, lie at precisely this crossroads.  

Increased competition has led insurers to employ high-profile marketing gimmicks, like geckos or touchdown dances, in an effort to become household names with friendly reputations. That means it's become necessary for them to establish a social media presence. Progressive's "Flo" character, for instance, has her own Facebook page, with hundreds of thousands of fans. But inviting social dialogue sometimes means inviting trouble, as Flo and her handlers found out the hard way this week.

Progressive encountered a Twitter revolt after the family of a woman killed in a car crash wrote a blog post criticizing the way the firm fought to avoid paying a claim. The post went viral, and the insurance giant then compounded its problems by spitting out automated tweets in response.

Experts who talked about the incident this week said Progressive fell into a trap that often catches large companies as they stumble around the social media world.

"The original response sounded genuine," said Jason Falls, a digital marketing consultant who helped health care firm Humana set up its social media program. "But the fact that they auto-responded the same statement to multiple people showed it was just a copy-and-paste job. More often than not, when that happens, it's not the technology that's to blame. You can blame it on the legal and compliance teams saying, 'You can say this and only this.' It makes you look cold and insensitive."

Both sides have willingly joined the insured-vs-insurers Internet fight. Insurance firms increasingly use the Web as a weapon against fraud, while consumers band together to demand better service, or to appeal denials of coverage. Both can claim victories. There are plenty of stories of insurance investigators who catch disability recipients bragging about completing triathlons on their Facebook pages or tweeting about a great trip to Paris while claiming depression. Meanwhile, earlier this month, a social media firestorm caused Aetna to back down and agree to cover colon cancer treatment costs for an Arizona patient who'd already exceeded his lifetime cap. A flurry of angry tweets really can make a big company reverse course.

'Shame on you'
Fall said he's used to seeing nasty comments pile up on insurance company blogs, Facebook pages and in Twitter feeds.

"It does make me cringe, but I also think it comes with the territory," he said.

It doesn't take long to find cringe-worthy comments on insurance company social media sites. Even days after the initial Progressive firestorm, comments left on Progressive's otherwise happy "Flo the Progressive Girl" Facebook page were dominated by vitriol: "Shame on you," says one. "Has Flo ever wondered why Progressive tries to get killers off the hook?" says another. Many writers called on the actress who plays Flo to quit.

Flo's hardly alone, however. When American Medical News did a survey of health insurance Twitter accounts last year, it found a never-ending stream of complaints:

*"Dear Cigna: How about, for the new year, you do something radical - like processing claims without 500 phone calls from me?"

* "Dear Humana, you've ruined my day. Worse, my wife's day. Way to CYA. I'm paying you to cover mine."

*"@Anthemhealth, so far u didn't send me my ID cards … kept me on hold for 25 mins and ur site isn't lettng me register. Nice service."

Insurance, necessarily, involves rejection. When you are in the business of frequently disappointing people, and making sure your rejections are lawsuit-proof, it's nearly impossible to run a free-spirited social media shop. Rachel Poor, who runs the social media marketing firm Thread Communications, said all heavily regulated industries face the Progressive dilemma.

"I think social media is still a sort of an enigma (to them). They all want to be there, they are told they should be there, but these companies are not used to people talking back to them in such a public forum," she said. "Ultimately, I think it will require insurance agencies to change the way they do business.”

Greg Matthews, a director at social media consulting agency WCG in Austin, said insurance companies often have to go into a Twitter or Facebook fight with one hand tied behind their backs.

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"Particularly in health care or financial services, there are privacy-related issues that you just can't discuss," he said. For example, if a patient complains about an uncovered medical procedure, the insurance company can't publicly talk about the patient. "People want you to be transparent and authentic all the time, but you just can't. ... It can be terribly frustrating.”

Falls said companies he works with expect the occasional public flogging after turning on a Twitter account, and they manage to survive by planning ahead.

"The thing I've tried to do with any client opening up its customer service channels -- you have to have a crisis communications plan mixed with a customer service plan," he said.  "You have to anticipate what will happen. ... Companies that dive in without a plan of attack for those situations are finding it difficult."

No stiff upper lip?
Automatic and formulaic responses have gotten many companies through old-fashioned media crises, Falls said. For example, journalists are often tolerant of canned answers, he noted -- but they typically don't fly on social media. If a Twitter response doesn't sound like it's written by a real person in response to a real person, the company is likely going to take a hit to its reputation. On the other hand, when million-dollar settlements might be at stake, no insurance company lawyer is going to be comfortable with a social media employee free-lancing responses. So Falls suggests a middle path.

"You have to have a lawyer on staff who can be on call and help your social media team craft communications in crisis situations," he said. "When you have a big publicity problem, you have your legal team working hand-in-hand with PR. Why wouldn't you do the same thing in the social media world?"

In general, he recommends that firms post a detailed, formal response on a website, and instruct their social media writers to tweet or post links to it, while adding personal notes separately. 

There are challenges, however: Many lawyers and companies don't have the stiff upper lip needed to ride out a social media crisis.

"Any industry that's heavily regulated will always have a layer of legal and compliance teams that have to be trained, and have to buy in," he said. "It can be done with the right legal team. But if you have a team that constantly says ‘no,’ it'll never work."

Matthews said effective social media must also be fast, and that's often unfamiliar territory for insurance firms.

"It means really changing processes that companies use. Rather than convening the executive committee for two days to make a decision about things, boil it down to the two or three people who can actually make a decision in hours and not days," he said.

It also means knowing who the influencers are in certain topics ahead of time, and planning to engage those people immediately when a crisis hits.

"It's not that hard to know these days who are the folks likely to be influential in this conversation," Matthews said. "You know what the top 10 issues that you might face are, and you know who is likely to be the most influential when those stories break, the people who might take your side or be opposed. ... Ask yourself how do you engage them. What is the content you can bring to bear that articulates your position rather than letting the public run wild. You can never control the conversation, but you can make sure your side is heard."

Finally, and most important, companies have to actually deliver on their promises, perhaps in a way they never have before, Matthews said. If a Twitter user complains and is asked to call customer service by a social media worker, that customer service experience had better be positive, Matthews warns. Otherwise, the angry consumer will have heavy new ammunition for waging a social media war.

"It really helps you find your skeletons in the closet," he said. "You have to have a mindset that you are grateful your customers are telling you what you are doing wrong, and you have the opportunity a chance to fix it. I know a lot of companies, maybe most companies, don’t feel that way, but that’s the only way to be successful in social media.”

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