Consumer Financial Protection Agency Required Now

November 2, 2009

Author: Barbara van Kerkhove

As Congress takes up the issue of financial  reform this fall, it should pass legislation creating a Consumer Financial Protection Agency (CFPA) to protect consumers from abusive financial products.  President Obama explained the reasoning on an appearance on The Tonight Show with Jay Leno (March 19, 2009):  “When you buy a toaster, if it explodes in your face there's a law that says your toasters need to be safe.  But when you get a credit card, or you get a mortgage, there's no law on the books that says if that explodes in your face financially, somehow you're going to be protected.” 

There is no single federal agency responsible for regulating financial services such as mortgage lending, credit cards, bank fees or car loans. Instead, we have a confusing system of at least seven agencies, each watching some part of the system, but none looking at the big picture or focused on preventing harmful or deceptive features in consumer financial products. 

Consumer protection falls through the cracks and becomes subordinate to regulators’ main job of protecting the “safety and soundness” of banks. For example, millions of consumers have been sold predatory mortgages or hold credit cards with hard-to-understand terms. While these products might have improved the short-term profitability of banks, they also harmed consumers and our economy.

In addition, regulators have failed to use their authority address abuses in the market.  Since 1995, only one of the top ten credit card companies have been charged with breaking the law, even though consumers file complaints daily. And Congress and regulators have yet to pass a single law to stop the mortgage lending abuses that led to our current economic crisis. 

This is why we need a consumer-focused agency with direct responsibility for the safety of financial products for consumers. Its sole mission: to protect consumers by preventing discriminatory, deceptive or fraudulent loans, ensuring products are fair and suitable to the buyer, and providing transparent, uniform enforcement.  Regulators would continue to focus on the safety of the financial system while the new agency would focus on the financial well-being of consumers. 

Moreover, by putting the protection of consumers from predatory financial products under a single agency, consumer protection is placed on equal footing with safety and soundness. And the incentive of banks to “shop for” a lax regulator will no longer be an option.

The Obama Administration’s proposal to create a Consumer Financial Protection Agency is supported by former Federal Reserve Chairman, and free-market supporter, Alan Greenspan, who was quoted in the Washington Post on September 27 as saying “the administration's plan to create a consumer protection agency was ‘probably the right decision.’”1  The President’s proposal has  several provisions to assure strong consumer protections by an independent agency with rulemaking and enforcement powers. However, many of these provisions are at risk of being whittled away as the legislation goes through Congress.

We need to make sure that the legislation passes and creates a Consumer Financial Protection Agency that:

• Is an independent agency that does not weaken consumer protections, or the enforcement of such, as administrations change.
• Includes an Office of Fair Lending and Equal Opportunity, with a director with specific mandated powers. This is a key addition to the most current draft of the   legislation.
• Provides for the simultaneous and coordinated exams of banks by the prudential and consumer protection regulators. Such coordinated exams will assure minimal additional regulatory burden, the concern of many community banks.
• Does not preempt state laws or state enforcement, including enforcement by state attorneys general. Federal preemption of stronger state consumer protection and fair lending laws prevents states from responding to state and regional problems in a timely manner.
• Has the authority to regulate and enforce the Community Reinvestment Act (CRA), as originally proposed by the Obama Administration, but omitted from the current legislation. Such authority protects communities of color and other financially vulnerable populations from predatory practices, including those that led to the current crisis.
• Applies standards based upon the financial product, not the specific entities that issue or sell that product. Exemptions, if any, should be based upon the product or activity, not the industry or entity. While the CFPA would issue rules based upon particular products, certain  industries or entities would be excluded from CFPA authority. This would leave   important aspects of our credit system poorly regulated and create opportunities for abusive lenders to offer their products. For example, it is important that auto    dealers are not exempt from regulation under the CFPA. Excluding such entities from regulation would encourage abuses such as “opportunity pricing,” allowing some dealers to take in more than 3.5 times more net income per used car than new-car dealers selling used cars.

Lax regulators helped boost the short-term profits of the banks which, coupled with the toothless oversight of the industry, hurt all of us.  Empire Justice is working with other local, state and national advocates and coalitions to assure that the CFPA becomes a reality and that it provides the strongest consumer protections possible.

We deserve better than the status quo; we need a strong, independent Consumer Financial Protection Agency to eliminate predatory lending and  financial services practices that hurt consumers and create enormous negative implications for our economy. 

Footnotes

1  Article found at: http://www.washingtonpost.com/wp-dyn/content/article/2009/09/26/AR2009092602706.html