The time has come for the creation of a Consumer Financial Protection Agency. For thirty years, Washington has been captive to a governing philosophy that eschewed regulation in almost any form, arguing that the hand of government was best kept behind its back. But the era of deregulated finance has shown that without public structures to ensure accountability and fairness, the system can not sustain itself. The result of this failed experiment in deregulation has been a crisis costing Americans $11 trillion in family wealth, $14 trillion in taxpayer bailouts and over 8 million jobs.
What a Consumer Financial Protection Agency Will-and Won't-Do
Q: How would a new "independent" agency work?
A: The Consumer Financial Protection Agency must be independent and fully empowered with the structure and authority needed to create and enforce fair rules of the road for consumer financial products. The Agency would have independent rulemaking authority applying to all financial products, regardless of the charter of the institution offering it. Likewise, it would have examination and enforcement authority over banks and non-banks, with examination and enforcement staff on its own payroll. The CFPA will be responsible for enforcing a range of consumer protection laws as well as addressing any unfair and deceptive practices. In order to avoid budget pressures or rider provisions, the Agency's budget must be funded by assessments, or some other independent source other than appropriations.
It is equally important that the Agency head be independently appointed by the president for a specified term and not subject to supervision by another regulator, person or board. Indeed, the CFPA's rulemaking, examination and enforcement authority, as well as all management and budget decisions, must not be subject to veto or approval by any prudential regulator or other person or board. The Agency must have a clear, uncompromised and independent focus on protecting consumers. This is the only way we will succeed in cracking down on abuses, strengthening our financial system, and preventing another financial crisis.
Q: Doesn't the CFPA add to the regulatory burden facing banks?
Today, regulated banks already face two separate examinations from their prudential regulator (for example, the OCC)-one from the safety and soundness examiner, and one from the consumer protection examiner. Despite claims to the contrary, CFPA examinations will result in no additional examinations; the CFPA examiner will simply take the place of the existing consumer protection examiner. However, issuers of consumer financial products that currently lack regulatory oversight-such as payday lenders, mortgage finance companies and brokers-will be subject to greater accountability. This lack of accountability led to widespread consumer abuses and was at the root of the financial crisis.
Q: Doesn't the CFPA create a new bureaucracy in an already crowded financial oversight field?
As part of comprehensive financial regulatory reform, the CFPA will actually streamline federal regulation. The Office of Thrift Supervision and the Office of the Comptroller of the Currency will be eliminated and replaced with a unified national bank supervisor. Today, rulemaking, supervision and examination are spread across multiple agencies — the CFPA will consolidate these activities and eliminate redundancies.
Q: Shouldn't the CFPA's rules preempt state consumer protection laws?
No. To end to the era of loosely-regulated, unsustainable credit products, the CFPA must be a floor, not a ceiling, for state laws. Broad preemption of state consumer laws is a recent development (with key steps in 1978, 1996, and 2004) that can be directly linked to both the credit crisis and the rise in foreclosures and personal bankruptcies. State officials are more easily held accountable to the consumers in their state than are regulators in Washington. That is why federal preemption has historically resulted in weaker protections for consumers--and that is why the industry continues to fight for it.
Fundamentally, preemption is not about efficiency; it is about the substance of consumer protection. The bank lobby's claim that national firms will be crippled by a "patchwork of state laws" is disingenuous. Not only have national banks easily complied with state laws for most of the 150 years they have existed, but states can and do enact uniform laws for widespread problems, such as the successful 49-state adoption of Uniform Mortgage Broker Licensing laws in 2008. Even with a Consumer Financial Protection Agency, Americans will continue to demand faster action to counter new industry abuses than a single federal regulator can accomplish.
Q: Won't the CFPA stifle innovation and consumer choice?
The CFPA will increase consumer choice by ensuring that lenders offer customers not just the riskiest product that will reap the highest fees, but the most affordable product for the customer. Offering customers higher-priced loans than they qualified for through steering, broker kickbacks and dealer markups was a hallmark of the recent deregulated era. As a result, toxic, unsustainable loans crowded out better alternatives, and the uneven regulatory playing field ensured a race to the bottom. For example, at the height of the subprime mortgage boom in 2006, risky loans had become so profitable to lenders that 61 percent of borrowers were steered into them even though they qualified for better loans. Americans will benefit from truly informed customer choice with a CFPA.
Finally, the industry should recognize that its customers no longer trust lenders to be fair and transparent. Like an outbreak of contaminated food, the deceptive practices that have flourished in recent years have a long-lasting reputation cost for lenders. A product safety agency can benefit the industry, helping restore America's confidence in the banking system.
Q: Shouldn't the CFPA be an office within a bank regulator or a council of existing regulators?
No. Making the CFPA an office within a prudential regulator would be worse than the status quo. Any solution that gives a bank regulator veto power over the CFPA — an agency charged with protecting the public — would be like giving the Small Business Association a veto over workplace safety rules. Likewise, if the CFPA becomes an office within Treasury, it must have statutorily-guaranteed autonomy in rulemaking and enforcement, like the OCC does.
In the House, Walter Minnick (D-IA) sponsored an amendment to the Wall Street Reform and Consumer Financial Protection Act (H.R. 4126) to replace the CFPA with a council of existing regulators. However, the Minnick amendment failed because of broad recognition that consumer finance is too important — and the existing regulators too compromised — for a solution that would essentially perpetuate the status quo. Nevertheless, industry lobbyists have designed various less-effective alternatives to the CFPA and continue to find Congressional sponsors for their ideas. The 34 members of the U.S. House of Representatives that offered amendments to weaken consumer protections in the House financial reform package received $3.8 million in campaign contributions from the financial sector in 2009.