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A New Agency to Protect the Consumer?

Martin Eakes CEO, Center for Responsible Lending

... The [proposed] federal Consumer [Financial] Protection Agency [CFPA], some people say it's just adding on another agency. We've got an alphabet soup of agencies that are supposed to regulate this marketplace.

Actually, the only entity that has been charged by law to write rules to protect consumers is the Federal Reserve, currently. So what the Obama administration's new proposal would do would be to take the rule writing from the Federal Reserve and place it in an independent agency. So ... it's simply making that function independent of the bank supervision structure.

I mean, if you're the Office of the Comptroller of Currency, which supervises national banks, and you get $50 million of revenue per year from each of the large banks that you supervise, how hard will you be on them? They are paying your bills, paying your staff, paying your agency's budget. There's just an inherent conflict of interest. ...

The Federal Reserve has come out against [the] Consumer Financial Protection Agency.

The Federal Reserve has said they want to keep their authority as the rule maker for consumer protection. ... It's a natural opposition for the Federal Reserve to want to keep its own turf. ...

Over 80 percent of the American people favor a new agency that would protect consumers against unfair financial practices. ...

And if the Consumer Financial Protection Agency is put in place, it will stop the practices that created the financial meltdown. We wouldn't have the foreclosure crisis in America if the Federal Reserve had done its job, which it simply can't do because it's so closely connected to banks in its current form. ...

Bill Strunk Banking consultant

I think [it] is a very bad idea. ... First of all, we already have an agency like that, so we're duplicating things. The Federal Reserve is in charge of this.

And the Federal Reserve is owned by the banks, and paid for by the banks. What they're saying is that we need an agency that represents the customers.

I don't like it because what starts out as a little deal in the government, all of a sudden becomes a monster, like Environmental Protection Agency.

I don't like the government dictating to bankers -- which is a free-enterprise system -- what they can charge for something. Let the market work and it will take care of itself.

If you're charging too much, people will leave you. People vote with their feet. ...

Sen. Chris Dodd (D-Conn.) Chair, Senate Banking Committee

... We're talking about a separate agency, a consumer financial product safety agency. Their sole responsibility is to keep an eye out for what happens to shareholders, depositors, policy holders -- the consumers and users of financial products. I fully accept the notion of the safety and soundness of the financial institutions is a very important function. But to ask the same person to be responsible for safety and soundness as well as what happens to that consumer [doesn't make sense].

The greatest accomplishments of the Depression-era legislation ... were the Federal Deposit Insurance Corporation and the Securities and Exchange Commission. Those were consumer ideas to guarantee that consumers would be protected. ... I think we got away from that, and we need to get back to it.

Elizabeth Warren Harvard Law School

Elizabeth Warren

We don't have any consistent rules about consumer credit. Instead, we have seven different federal agencies, each of whom owns a piece of the action in terms of regulating consumer credit, and a lot of issuers, then, who can just simply pick. Well, I think I'll get a national bank charter, if that's the regulatory I like, and that's going to be useful to me. ...

The budget of the regulators comes from those they regulate. So if a big credit card issuer says to the OCC [Office of the Comptroller of Currency], one of the principle regulators, "We're leaving you and becoming a thrift and going to take our charter somewhere else," the budget will shrink for the OCC.

That tends to make the regulators very friendly.

So the idea, really, is to create an agency that will represent consumers? ...

The idea is to cut out this competition and get a level set of rules, a set of rules that starts with the premise that the individual is important and at a minimum, ought to be able to read and understand the agreement that he's being asked to sign.

... A white paper [PDF] that's currently being turned into legislation recommends that state regulators keep their power. Now, isn't that just creating another set of confusion, another whole bunch of regulators?

No. The point behind the Consumer Financial Protection Agency is that we will have a federal floor, and we'll say, "No matter where you live in America, if you take out a mortgage, a credit card, a car loan, here are the basic safety regulations."

If the states want to go higher and say, "You know, that may work around the country, but the folks here in Texas want to have a little more protection for the citizens of Texas," they have the right to do so. …

The Federal Reserve and the other agencies that are involved have that authority already. The credit card legislation that's passed has already outlawed or mandated many of the things you're talking about.

The Fed does have the power right now. In fact, they've had the power for decades, and they have never used it. It's not that we need a law to empower the Fed to act. It's that the Fed won't act on behalf of consumers.

They have only acted, like the OCC, like the OTS [Office of Thrift Supervision] and this other alphabet of regulatory agencies, to protect the financial institutions.

No, this isn't about duplication. What this law is about is saying: "You guys had your chance. So we're going to take out a pair of scissors, and take your bureaucracy that was supposed to be involved in consumer protection, and we're going to put it in one agency that's going to develop some expertise, that's going to have some teeth."

That's the last thing that the credit industry wants.

Nessa Feddis Vice president, American Bankers Association

What's the American Bankers Association's position on the Consumer Financial Protection Agency?

Quite simply, it's unnecessary; it's going to delay needed improvements. It's going to limit people's choices, and it's going to be very costly. We think that you can accomplish the improvements needed by fixing what needs to be fixed. It's not necessary to create one more duplicative, costly bureaucracy. …

So the position is that the agencies have actually done a good job over the last 20 years regulating the credit card industry, and we don't need a new agency to take care of what's happened?

In fact we've seen that Congress and the regulators have addressed the credit card issue, and so arguably, no, an agency is not needed; it's already been done. All the issues have been addressed on the credit cards. The mortgage issues are being addressed. …

Under this agency, it's not just that people will have fewer choices; they will practically have no choice.

The cornerstone of the proposal is to require this agency to design a government product based on what the least sophisticated customer might be able to handle. And everybody will get the same cookie-cutter, one-size-fits-all checking account, credit card account, or mortgage loan.

And the agency may require not just that the entity offer the product, but they promote it as a superior product. And any entity who wants to offer something else takes a great risk of substantial penalty that down the road, with 20/20 hindsight, somebody is going to say, "That wasn't suitable, that was too confusing." So there's not going to be a lot of incentive to offer something other than the government-designed product.

Are you against safety rules?

No. But if this agency had been in effect 30 years ago, 40 years ago, we wouldn't have ATMs, we wouldn't have debit cards and online banking, because the basic program, the basic checking account that everybody could have would be one that's accessible only by checks. And offering something beyond that, like a debit card, which would've been unfamiliar initially, would have been too risky.

There are ATM cards, there are ATM machines, there are checking accounts and all of these financial conveniences in plastic in countries that never had a credit card system like ours.

I'm talking about the power of this agency to basically get us stuck in 2009. Like your consumer products now, because they're not going to get better. There's not going to be anything new.

Sen. Richard Shelby (R-Ala.) Senate Banking Committee

Sen. Richard Shelby (R-Ala.)

What is your opposition to the Consumer Financial Protection Agency?

My basic opposition is that it would separate the prudential regulator -- as it's written now, that is the Federal Reserve, the FDIC [Federal Deposit Insurance Corporation], the Comptroller of the Currency, and so forth -- they're the basic regulator, which ties together consumer issues with safety and soundness.

I think that we shouldn't separate the two. Now, how we should do it, I'm not sure. I've talked to Sen. Dodd about this, and this will be part and parcel of the debate that will be going on.

You've had a complaint for many years about the Federal Reserve's failure to do various things. They ... had the power to protect consumers, but they didn't exercise it.

I think we'll all have to admit that the Federal Reserve has basically failed us as a regulator of the banks for safety and soundness. You have to add on that they were not a great regulator for consumer protection. … But it can be done. Besides the Fed, you have FDIC, you have the comptroller, and so forth.

I just believe we shouldn't separate it. Now, how can we work this out legislatively to keep the people who are responsible for our safety and soundness? And it might not be the Federal Reserve. I believe that we ought to take away the regulatory powers of the Federal Reserve, and let them deal with monetary policy, because I think overall, they've done a good job there, but done a poor job as a regulator.

So you would be in favor of an agency, as long as it integrated the functions of keeping the banks solvent and protecting consumers at the same time.

I think the agency should not be a separate agency. It should be integrated into whoever -- if it's comptroller of the currency, the FDIC, whoever is standing once we go through this legislation as a regulator of safety and soundness -- that they have the power of the consumer protection.

As long as it's not the Federal Reserve.

Yeah, as long as it's not the Federal Reserve, absolutely.

Timothy Geithner Secretary of the Treasury

Right now you have this responsibility for writing rules and enforcing them diffused across multiple agencies, probably seven at the federal level, and across all the states in the country. And most of the people [with that] responsibility had other responsibilities too, and they just didn't do a good job of doing it.

So to streamline it and to make sure there's one place the American people can hold accountable for better protections is to put that into one agency with a simple, clear, single mission to protect consumers.

Sen. Shelby says you cannot divorce protecting consumers from the soundness of the banks. And if you divide it up, it's just not going to work, and you're going to create -- he recently said -- a "nanny state."

I respect Sen. Shelby on many issues. We agree on a lot of things. But on this I don't think he's right. There's no inherent conflict between consumer protection and safety and soundness. … We lived with a system where you had people responsible for safety and soundness doing consumer protection, and they didn't do a good enough job at that.

But the bankers say that there are enough bureaucracies already in place.

And I agree with that completely. Again, right now our problem is not that we have too few people doing this; they just didn't do it well.

And it's partly because it was responsibility diffused around a whole different set of agencies -- seven at the federal level -- most of whom had other preoccupations, other responsibilities. So it was just a complicated mess. And we're trying to do it for a simple, streamlining consolidation of that responsibility in one place.

For consumer lending.

For consumer lending, exactly.

You've had to run up against the opposition not just of the banking lobby … but your own regulators … here in the government.

Yeah. Well, you know, we're trying to change a system that didn't work. And there's a lot of vested interest in that system. Most people think those interests were mostly in the financial community. They would like to retain the freedom to do a bunch of things that they found temporarily very lucrative. We're going to prevent that.

But you have a lot of people with a vested interest in what you call "regulatory turf," and they're understandably trying to protect that turf.

… The banking industry itself, it seems, in advertisements now is saying: "We've heard you. Here's more transparent credit cards, transparency in mortgages."

It's a bit of a late conversion. It would have been nice to happen earlier. What you want these banks to do is to be competing, not to take advantage of a consumer. You want them to be competing and providing more simple, less risky, basic products that are more appropriate.

What happened across the industry was you found people paying their salesman to talk a family into taking a loan that was more lucrative for the bank or for the finance company, but clearly inappropriate, ridiculously expensive to the consumer. ...

Scott Talbott Vice president, Financial Services Roundtable

Scott Talbott

We are opposed to the CFPA. We're for consumer protection … but we don't think the CFPA is the most effective way to achieve that goal.

But the other agencies … that were supposed to regulate, they're seen as friendly to your membership because they fund them and … their primary concern usually is the safety and soundness of those institutions, not necessarily the safety and soundness of the customers.

The fate of the institution and the fate of the consumers are inextricably linked … and have to be examined together. … The reason we're opposed to the CFPA is because [it would mean] creating a separate agency to regulate just products.

You're saying that operations of the financial side of a business should be wedded with the nature of its customer services, whatever those are?

The regulation for safety and soundness of the institution itself should be wedded with the regulation of the product that it sells. The two go hand in hand. So why create a system where you have two regulators with half the information rather than one regulator with all the information?

We have a Commerce Department to promote commerce … and help industry do business. And we have a Justice Department that prosecutes business when they get over the line. So normally, you do have a separation of interests … depending upon what the goal is. In this case, it seems that the traditional regulators, that alphabet soup of agencies plus the Federal Reserve, simply failed. Why should we trust that they would do it in the future?

The answer is to elevate the concept of consumer protection and make it a core mission, take all of the concepts that are embedded in the CFPA proposal -- accountability, transparency, comparability -- and use those as guidelines for the new elevated position of consumer protection at the regulators.

The OCC, the OTS and the Federal Reserve … are all saying, "We're into consumer regulation." But they haven't even figured out how to divide that up amongst themselves.

Actually, they have because each one of those agencies governs a particular legal structure. If you're a financial services holding company, you're regulated by the Fed. If you are a national bank, you're regulated by the OCC. If you're a depository institution, you're regulated in part by the FDIC. So there are clear lines of demarcation within the regulators.

So the objection to the Consumer Financial Protection Agency is that it's another layer of regulation? Or it will restrict lending?

The main objection is that it creates a separate regulatory body that separates out regulation of the product from regulation of the institution. And we think one regulator should oversee regulation of both. … In addition, … the CFPA will set a floor for national standards and encourage each state to do more. … So imagine trying to structure a mortgage department offering mortgages in all 50 states with 50 different consumer protection standards. It would be very difficult and very expensive. And the cost of that compliance will be passed on through higher fees. …

Isn't part of that tension between the federal regulators and the state the reality that, over the last number of decades, with deregulation, many of the state regulators have been more diligent, tougher than the feds?

The states missed a lot of the practices of the mortgage originators. … The bulk of the subprime mortgages were not made by your mainstream lenders. They were made by off-the-grid, unregulated mortgage brokers sitting at a kitchen table convincing a borrower, a couple, to take out a loan. And there was no state regulation of those entities.

There's no federal regulation either. But the state guys, who were at the grassroots level, they missed it as well. Now, this is not an impugning of the state issues at all. I'm simply saying that our objection to the CFPA is that it creates a patchwork of 50 different state protection regimes, which is not the most effective way to protect consumers.

So your answer would be possibly to make this agency even more powerful, to override the states as well and to be one unified agency?

Yes. We'd like to see uniform national standards. And that is a more effective way to do business for consumers as well as businesses going forward rather than 50 different state regimes.

Jim Blaine State Employees' Credit Union, North Carolina

Jim Blaine

The Consumer Financial Protection Agency is an interesting idea. It addresses a need in that we need more protections for the consumer in the financial industry. That's without question. What's the best method of achieving that is open to great dispute.

I think splitting it away from the chief regulator may be a mistake. You may end up with multiple masters attempting to achieve the same purpose.

At least with credit unions, I think it's a good idea to put it with our federal regulator and with our state regulators, because they're already in our shops; they're monitoring our performance; they have a good sense of what we do and don't do. … You don't have to reinvent the wheel every time a new regulator comes in. So the need is there. The best method I'm not quite sure of yet. …

posted november 24, 2009

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