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How a Consumer Protection Agency Would Work

By Karen Weise

For decades, the Federal Reserve and other government agencies have had the responsibility to look out for consumers in the banking and credit industry. But in the aftermath of the financial meltdown critics argue these agencies have seldom used their power to act on behalf of consumers. "You can't look at the system and say it served the American people adequately," Treasury Secretary Timothy Geithner told FRONTLINE. "It basically failed."

In an attempt to fix the gaps in consumer protection, Geithner and the Obama administration have made the creation of a Consumer Financial Protection Agency (CFPA) the cornerstone of their proposed financial reforms.

What is the CFPA?

The CFPA would be a new governmental body whose sole purpose would be to protect consumers. In 2007, Harvard Law Professor Elizabeth Warren, who now serves as chair of the committee overseeing the TARP [Troubled Asset Relief Program] bailout money, first proposed a new federal agency to stop abusive or deceptive financial products on everything from credit cards to mortgages.

Building off Warren's ideas, the Obama administration outlined a new CFPA in June, and began working with the House and Senate banking committees to turn the idea into law. Currently, versions of the bills are working their way through both (PDF) houses of Congress. Though lobbyists and Congress are still wrangling over the details, the overarching idea has remained consistent -- that the new agency would have broad power to investigate problems and enforce laws on behalf of consumers.

How would it work?

The agency's mission is to "promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services." To do this, the proposed CFPA would consolidate the consumer protection functions of existing regulatory agencies, such as the Federal Reserve and the FDIC. In addition to oversight responsibilities, the new agency will also have rulemaking powers to fill in the gaps between existing laws.

One of the most contentious elements of the CFPA is that the agency would establish the minimum standard for regulation -- overriding state laws that permit practices deemed abusive by the agency. Individual states could enact tougher regulations, however.

What would it regulate?

As proposed, the agency would have broad oversight over nearly every consumer financial product, including credit cards, debit cards, mortgages, money transfers and payday loans. It would make sure that the disclosures for financial products are clearly presented to consumers, and would protect against abuse and fraud. The CFPA would also be charged with ensuring that traditionally underserved consumers have access to the credit system and other financial services.

What wouldn't it regulate?

Several industries have already successfully lobbied exemptions from the House of Representative's bill creating the new CFPA.

• Small banks and credit unions would not face regular agency examinations, meaning 98 percent of the nation's banks would be exempt according to The New York Times.

• After an expensive ad campaign sponsored by the U.S. Chamber of Commerce, retailers carved out an exemption as well, meaning retail products like gift cards and lay-away programs would not be covered. The retailer exemption also means some student loans issued by private colleges would not be covered, because the students are considered "customers" and the colleges are considered "retailers."

• Auto dealers also won't be regulated by the new agency. About half of auto buyers get loans from dealers, who then typically sell the loans to auto finance companies. (The finance companies would be covered in the agency.) Dealers, however, have a history of steering customers into higher cost loans and tacking on unnecessary fees ProPublica reports.

• Other non-bank entities will likely not be covered, including accountants, tax preparers, real estate brokers and agents, and providers of IRAs, 401(k) plans, 529 plans and pension plans.

Who opposes it?

The financial services industry has largely opposed the creation of a new agency. The American Bankers Association's Senior Counsel Nessa Feddis contends that existing agencies can be reformed to take up the task of consumer protection. "Quite simply, it's unnecessary ..." Feddis tells FRONTLINE. "It's not necessary to reinvent the wheel. Fix what needs to be fixed."

Current regulators, including FDIC Chief Sheila Bair and Federal Reserve Chairman Ben Bernanke, (PDF) initially agreed with the financial services industry on this front, saying they were up to the task of protecting consumers in the future. As momentum gathers for the new agency, the Federal Reserve has unveiled new proposals for protecting consumers.

Critics of the new agency also contend that any new regulations by CFPA will make it harder for consumers to obtain loans, limit how much financial institutions can lend, and will increase the costs of lending -- costs that will be passed on to consumers.

UPDATE: As of mid-January 2010, the debate over regulating the banking industry has heated up again and the CFPA has become a key flashpoint.

On Dec. 11, 2009, a few weeks after the initial broadcast of The Card Game, the House passed the Wall Street Reform and Consumer Protection Act, which included a new consumer regulatory agency. A similar bill is now working its way through the Senate Banking Committee and is expected to be voted on in the coming months.

But on Jan. 16, The Washington Post reported that in an attempt to gain bipartisan support for the measure, Sen. Chris Dodd (D-Conn.), chair of the Senate Banking Committee, was weighing dropping the proposed agency and assigning its regulatory powers to an existing agency.

A few days later -- after Massachusetts voters awarded the late Sen. Ted Kennedy's seat to a Republican in a vote widely interpreted as a referendum on the Obama administration -- the president held a private meeting with Sen. Dodd at the White House, and, according to The New York Times, signaled that the proposal for a new consumer agency was "nonnegotiable."

Karen Weise is a second-year student at the UC Berkeley Graduate School of Journalism, where she received the Mark Felt Scholarship for Investigative Reporting.

posted november 24, 2009; updated january 25, 2010

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