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Do We Need a Consumer Protection Agency?

Should an independent Consumer Financial Protection Agency be created?

Gail Hillebrand

Campaign manager for the Consumers Union’s Defend Your Dollars campaign

It is long past time for a Consumer Financial Protection Agency. Our bank accounts should be a secure place to keep our money, not a black hole where chunks of our hard-earned wages disappear in unexpected fees. We should be able to pay off our loans in a reasonable time by making all of the payments. Our credit cards shouldn’t have a never-ending onslaught of new tricks and traps. Financial products should be safe to use.

The current system for federal banking oversight has failed to provide these results. Instead, we face complicated pricing that runs up the cost beyond what an ordinary user of the financial product would expect. Lenders had free rein to push risky exotic loan features on people for whom those features were unsuitable. Consumer protection by federal banking regulators has worked like an elaborate form of bait and switch. We are promised protection, but instead we get more fine print disclosures.

We need active, ongoing oversight of the market for consumer financial services products. The current banking regulatory system just hasn’t provided a safe financial marketplace. Congress can’t keep up with every bad financial practice, and we simply can’t afford to wait for problems to reach the crisis levels that spark new laws. Last year’s shameful frenzy of interest rate spikes by credit card banks starkly illustrates the need for someone in Washington to finally have the sole job of looking out for banking and credit customers.

An independent CFPA would make and enforce clear rules of the road for everyday financial products. It could vigorously enforce those rules; pay real attention to preventing the growth of harmful practices; be accountable to the public; and provide real consumer protection in financial products and services.

Steve Bartlett

President and CEO of the Financial Services Roundtable, a trade organization representing 100 of the country’s largest banking, insurance and securities companies

It’s no secret that we need regulatory reform and we need it now. Let’s be frank: The current system failed us. When something breaks down in our economy, it is our collective responsibility to fix it. Consumer protection is a key ingredient of this regulatory reform. Strengthening consumer protection within the existing regulatory agencies is the most effective way to accomplish the goals we all share of protecting consumers and re-energizing the American economy.

Regulatory agencies were not built overnight. Strongholds like the SEC, FDIC, OCC and the Federal Reserve took years to implement and refine. They are pillars of the economy, and overall, they do their jobs very well. Strengthening the consumer-protection mandate of these agencies is the best and most effective way to strengthen consumer protection. A newly created, separate government agency is the wrong approach. Separating consumer protection from prudential regulation for safety and soundness would split regulation of the product from regulation of the institution itself. The fate of the consumer and financial institution are inextricably linked. Their regulation should be as well.

All consumer protection rules issued by these prudential regulators should be uniform and standard across the country. Lack of uniformity will lead to a reduction in the availability of products, an increase in the prices, and confusion among consumers. The economy needs strong uniform national standards to protect consumers and help keep American competitive in the global marketplace. We seek equal protection of the laws from Boise to Birmingham and every place in between.

The American consumer needs effective and strong consumer protection now. Modernizing existing tools is the most effective way to strengthen consumer protection.

Adam Levitin

Associate professor of law at Georgetown Law, specializing in bankruptcy and commercial law

Congress should create an independent Consumer Financial Protection Agency. An independent agency with a sole mission of consumer protection in financial services would ensure that consumer financial products are fair and transparent. It would also improve competition in financial services, benefiting consumers with lower costs of credit, greater credit availability, and more meaningful product choices and innovations.

In the current system of consumer protection in financial services, regulatory authority is dispersed among over a dozen federal agencies and hundreds of state agencies. Regulatory authority varies by the type of product and the type of financial institution involved. This creates three problems. First, dispersed responsibility reduces accountability. Because consumer protection is everyone’s job, it becomes no one’s job, leaving consumer protection an orphan mission.

Second, it creates opportunities for regulatory arbitrage. Banks can select their regulators, and regulators’ budgets often depend on the number of banks they regulate. Regulators must compete with each other in laxness to retain their banks clients’ business.

Third, many consumer protection agencies are also tasked with a conflicting mission — ensuring the safety-and-soundness of banks. Safety-and-soundness means, above all, profitability. Abusive consumer financial products are extremely profitable for banks. Given banks’ ability to threaten to take their regulatory business elsewhere, consumer protection has routinely been subordinated to banks’ profitability concerns.

Consolidating regulatory authority in a single-mission CFPA would correct these problems. It would also create an agency with authority and motivation to improve financial product disclosure. Improved disclosure enables better comparison shopping by consumer and improves price competition, benefiting consumers with lower costs for financial products. Competition would reduce banks’ profit margins on financial products, which would encourage innovation, as banks would strive to distinguish themselves in product offerings. Creating a CFPA would improve the consumer financial products market and help protect against future economic crises.

David Evans

Lecturer in law at the University of Chicago Law School and executive director of the Jevons Institute for Competition Law and Economics at University College London

Consumer protection regulation is necessary. It could be better. But let us face the reality of the times: Now is not the right time to revamp consumer financial protection. We are devoting too much attention now to a particular set of proposals when there are, and have been, far more pressing issues.

The Treasury has wrapped consumer protection in the flag of the financial crisis. Yet there is no credible evidence that failures in the current system were a significant factor in causing the financial crisis. Many of the consumer protection problems that people point to are mainly the result of collective delusion – the madness of the crowds – that housing prices would go up forever.

This focus on consumer protection has deflected attention from problems that really were at the heart of the financial crisis. Remarkably, the administration has proposed no significant reforms of Fannie and Freddie. The administration has come forward with nothing on dealing with the credit-rating agencies. Congress is going to be spending a lot of its scarce time on consumer protection issues that had little to do with the crisis and which, while there are no doubt problems to be solved, are hardly urgent ones.

The Treasury and Congress have also proposed this sweeping overhaul of the lending industry at just about the worst possible time. A massive credit crunch is holding back the economy. New businesses that drive most of the job growth in the economy can’t get loans. Small businesses have had their credit lines slashed. Consumers who need to borrow money can’t. Now is the time to focus on policies that encourage lending. It is not the time to impose a new layer of regulations and costs that will it more expensive and legally risky for financial institutions to lend money to people and businesses who want to borrow it.

If we are going to have a single Consumer Financial Protection Agency, I would give it to the Federal Trade Commission. They are a well-run government agency, have significant expertise in consumer protection and have first-rate economists. The chairman serves at the pleasure of the president and the commissioners are drawn from both parties and serve long terms. I would create a Bureau of Consumer Financial Protection, which would report to the chairman of the FTC. That would be a lot easier than setting up a new agency.

This passage is adapted from a speech originally given in January at a New York Federal Reserve Bank conference.

Martin Neil Baily

Senior fellow in economic studies at the Brookings Institution

Arguments for a CFPA: Many households took out mortgages they could not afford, and then when housing prices fell, many of them were unable to refinance and faced foreclosure, leading to large-scale defaults on financial securities held by banks, and causing a wider-spread economic crisis. Further, some credit card companies and payday lenders used deceptive practices, charging high rates or unfair fees to customers.

The job of protecting the consumer seems to have fallen between the cracks, given that the banking regulators’ mission is the safety, stability and soundness of the financial institutions, not the consumers served by those institutions. For these reasons, an independent agency focused on consumers should reduce deceptive practices and the chances of another crisis.

Arguments against: Federal housing policy was a major contributor to the mortgage crisis because banks were encouraged to make unsound sub-prime loans to meet congressionally mandated affordable housing goals. Government was the cause of the problem and is not the solution.

There are already multiple federal agencies regulating the financial sector, so why do we need another? Consumers’ best protection is a competitive market where they can choose another mortgage or credit card company if they do not like the one they have.

My bottom line: A consumer protection agency won’t be perfect, but it will help, especially in situations where consumers have been presented with inadequate or confusing information.

Because it will be difficult to get legislation through Congress to create a separate new agency, it may be better set up an independent division within the existing regulators. Or, have an independent rule-making agency, but with the enforcement done through existing regulators. Federal housing policy was part of the problem and should be reformed, but that does not weaken the case for better consumer protection.

Amanda Engstrom

Senior vice president of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness

As we struggle to get the economy moving again, we must ensure that our efforts to fix the financial system help protect consumers and investors and do not actually make things worse. Unfortunately, that’s exactly what will happen if Congress approves legislation creating the Consumer Financial Protection Agency. Specifically, there are four major problems with this legislation.

First, the CFPA is not limited to, nor even targeted at, credit cards and mortgages. The CFPA would have power over businesses that are non-financial in nature and that have, at best, a tangential relationship to consumer finance. Additionally, the bill the Senate is considering would require that the CFPA regulate any business that extends credit in which a finance charge is imposed, or in which more than four payments are allowed over time. This would encompass businesses across the country that provide flexible payment plans to their customers. In addition, businesses that simply contract for goods or services with firms that offer consumer financial products would be under the CFPA’s authority — including advertisers, technology companies and data processers. As such, rather than keep the agency’s focus on the areas where risk to consumers is highest, the CFPA will become an overly broad and massive new agency with an expansive, ill-defined mission.

Second, the CFPA doesn’t consolidate regulations — in fact, most of the businesses referenced above are already regulated by the Federal Trade Commission, which will retain its authority.

Third, the CFPA sets the floor for consumer protection laws — allowing the 50 states to pass their own laws that may conflict with the CFPA and with each other. In addition, state attorneys general can enforce the CFPA laws based upon their own interpretation. This means a lot of overlapping, confusing, and conflicting rules, which makes little sense in light of the need to simplify disclosures to consumers.

Lastly, the CFPA would have very broad and vague regulatory authority to limit or prohibit products that are “abusive,” but no one knows what that means. And businesses that want to comply won’t know what that means, leaving them in a guessing game about whether they’re in compliance. This should provide little comfort to consumers, and creates significant disincentives for financial institutions to lend to the consumers and small businesses most in need of credit these days.

We need better ways to protect consumers. The CFPA, however, would do a great deal of economic harm to consumers and to our economy without ensuring new protections or solving legitimate shortcomings in our financial system. Congress and the administration should go back to the drawing board.

Susan Weinstock

Director of the Financial Reform Campaign at the Consumer Federation of America

Americans have experienced significant problems with credit card terms and conditions, banks that manipulate payment order to extract maximum bounced check and overdraft fees, and deceptive marketing of financial products and services. Unfortunately, the bank regulators who could have reined in these abusive practices have consistently put consumer protection in the back seat and let the banks drive the car.

We need the Consumer Financial Protection Agency, whose sole mission would be to protect consumers. The CFPA would oversee financial products and services like the Food and Drug Administration oversees the safety of food and drugs. It would ensure that products are fair, sustainable and suitable to borrowers.

The banks have found it quite lucrative to have consumer protections spread across seven agencies overseeing almost 20 different laws. This system has allowed them to make reckless loans in search of short-term gain, practically crippling the economy in the process. The CFPA would ensure that lenders make responsible loans that are good for the long-term and for the economy.

In addition, bank regulators too often have treated consumer protection as less important than or even in conflict with their mission to ensure the safety and soundness of financial institutions. They failed to rein in abusive lending practices because they were not independent of the lenders they regulated and because they subordinated consumer protections to bankers’ short-term profits.

Enactment of the CFPA would allow the bank regulators to focus solely on the safety and soundness of the banks, while the CFPA would focus on the safety and soundness of families who buy credit products and services. Americans have paid for this economic meltdown through the lost value of their homes, through their lost retirement and college savings, and through the bailouts paid to the big banks. Americans have paid enough and deserve an agency looking out for them.

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