By Campaign for America’s Future
A Consumer Financial Protection Agency would serve the people who take out mortgages, use credit cards, borrow money for their small business, or take advantage of other household financial service products.
Several government agencies safeguard the interests of financial institutions, but none have a primary responsibility to look out for the interests of consumers. In fact, a primary argument of critics of a consumer financial protection agency is that protecting the soundness of a financial institution should be the only major concern of government. The most recent financial crisis, however, proves that a failure to implement the most basic consumer protections undermines the soundness of the financial system.
By creating an agency that works to root out fraud, deception and other unfair business practices, we can create a financial system that is ultimately more sound because it will not be vulnerable to the kind of bubble burst that was the result of the previous era of deregulation.
Don’t we already have agencies responsible for protecting consumers in the financial sector?
Consumer protection responsibility for financial products has been scattered across seven different agencies, and those functions have a much lower priority than looking after business interests. To remedy this problem the Obama administration proposed creating a new independent consumer regulator that would consolidate and streamline this authority, and focus on establishing and enforcing fair rules for banks and other lenders when they deal with American families. The agency they proposed would be independent, with authority and enforcement over all lenders.
The House has already passed a bill on this, right?
Yes. It’s part of the the Wall Street Reform and Consumer Protection Act of 2009 (HR 4173), which passed the House on December 11, 2009, by a 223-202 roll call vote.
The consumer financial protection provisions in that bill would establish a new, independent and stand-alone agency, reporting to the president, to oversee consumer protection in financial services. Its mission would be to ensure that credit, deposit and payment products and services and related products and services, are being offered in a fair, sustainable and transparent manner. It would promote transparency, simplicity, fairness, accountability and access in the market for consumer financial services, and seek to ensure that consumers have, understand and can use the information that they need in order to make responsible choices about consumer financial products and services.
What’s the difference between that and what’s before the Senate?
The proposal for a consumer office that Senate Banking Committee chairman Christopher Dodd released on March 15 is much weaker than what the House has already approved. Instead of an independent, stand-alone agency, consumer protection would be folded into an agency at the Federal Reserve. it would only have authority over banks with assets exceeding $10 billion, although the Dodd bill does give the agency authority over all mortgage lenders as well as payday lenders. Putting this agency in the Federal Reserve would mean that some of the same regulators who failed to stop abuses for years—people drawn from or chosen by the banking sector and who have shown themselves to be beholden to banking interests—can undermine any attempts by this new consumer unit to do its job, especially when doing its job entails angering the banks. As we saw in this crisis, protections only work if they are enforced.
But won’t an independent consumer agency force banks to engage in unsound practices, like making loans to people who can’t pay them back?
No. Existing regulatory laws and procedures, as well as language in the House legislation creating the agency, would require the new agency to take into account bank soundness and safety. Plus, any new rule the agency would issue would be subject to review by the banking industry and the general public before it is implemented, and proposed rules that put the soundness or safety of financial institutions in jeopardy could be legally challenged.
Aren’t small businesses united in opposition to this proposal?
Absolutely not. A January 2010 survey of more than 1,200 small business owners from 13 states by the Main Street Alliance found that 67 percent of respondents support the creation of a Consumer Financial Protection Agency. Also, a statement in support of a consumer financial protection agency by Business for Shared Prosperity was signed by the U.S. Women’s Chamber of Commerce, U.S. Hispanic Chamber of Commerce, South Carolina Small Business Chamber of Commerce, American Made Alliance, Main Street Alliance, American Business Leaders for Financial Reform, Oregon Small Business Council, Richmond, VA Metropolitan Business League and Atlanta Women in Business and many other business owners and executives across the country.
But I heard that this consumer agency would actually hurt small business.
That’s the thrust of a multimillion-dollar lobbying effort led by the U.S. Chamber of Commerce, the American Bankers Association and other financial industry groups. It’s based on fear and threats, not facts. They say that a consumer financial protection agency would mean less credit for small businesses, but small businesses are already having a hard time getting credit in this recession, especially from the large financial institutions whose behavior caused the crisis. A consumer financial protection agency would be an advocate for small entrepreneurs, fighting for fairness and transparency.
As Frank Knapp, President and CEO of the South Carolina Small Business Chamber of Commerce, put it, “When the U.S. Chamber of Commerce opposes the CFPA saying that it would choke off credit to small businesses, they are obviously out of touch with the real crisis in small business lending. While the U.S. Chamber cries crocodile tears for small businesses, it really represents the financial institutions responsible for today’s economic crisis and the pain of small businesses.”
Wouldn’t a new agency impose expensive compliance costs that would end up being passed down to consumers?
Existing law requires an agency to take into account the compliance costs of the regulations it issues, so a new consumer financial protection agency couldn’t unilaterally impose new compliance costs on banks and other businesses without justification. Plus, consolidating consumer regulations that now exist across an alphabet soup of agencies allows for more efficiency and potentially lower, not higher, costs.
I get why a stand-alone a consumer financial protection agency would be a good thing. But why not compromise with conservatives for the sake of getting at least some modest changes to the status quo?
Because even the compromise that Dodd has proposed is opposed by the lobbyists that the Senate conservative bloc is taking its cues from. When reports first surfaced that Dodd was backing away from an independent, stand-alone agency, the U.S. Chamber called the change “merely a victory in form, not in substance. Make no mistake about it; this new proposal is nothing more than a wolf in sheep’s clothing.” A consumer protection clause that is weaker than what is in the House bill—which is itself a compromise between progressive and moderate lawmakers—is not defensible as either good policy or good politics.
“Prompt consumer protection is essential to a safe and sound banking system,” says Consumers Union in a recent statement. “It is essential that consumers have an independent voice that can act promptly to address new and emerging unfair and abusive practices by banks and non-banks before these practices spread. … Moving the boxes around is not the true reform consumers need or expect; it merely maintains the status quo.”