Last Thursday, the House Financial Services Committee approved legislation to create a Consumer Financial Protection Agency aimed at protecting consumers against abusive and “unfair” home mortgages, credit cards, and other financial products. The agency would be the first devoted solely to consumer financial protection. In an editorial today, we pointed out that a large number of consumers affected by the mortgage foreclosure crisis were not taken advantage of by predatory lenders, but instead were acting as “predatory consumers”. That punchy argument aside, it’s clear that the realignment of the existing network of government financial regulatory agencies could either streamline financial regulation (the goal) or add a layer of unnecessary beaurocracy.
The passage of the legislation out of committee on Thursday represented a partial victory for the Obama administration and its push to rework the financial regulatory system. Opponents of the plan contend that it will complicate bank regulation by creating a new beaurocracy and lead to higher lending rates for consumers. In fact, during the four days of committee debate, arguments were consistently raised that the agency would threaten the overall safety and soundness of the financial services industry. Opponents additionally argue that the existing regulators, including the Federal Reserve, are already capable of protecting consumers as well as the financial markets, and the new agency would simply add another layer of complexity to the system.
So what does the bill do? The legislation passed by the Committee would transfer consumer protection duties from federal bank regulators to the newly proposed Consumer Financial Protection Agency (CFPA), adding additional oversight for payday lenders and check cashing outlets. The bill was modified from the original Obama plan while in committee by including language allowing for a limited pre-emption of state consumer laws for federally regulated banks (state laws can only be overridden if they significantly interfere with federal regulation), and by excluding most banks and credit unions from “primary enforcement” and examination.
The CFPA could take enforcement action if the primary bank regulator did not, effectively creating an additional layer of potential enforcement and beaurocracy. Also excluded are community banks (or those with less than $10 billion in assets) as well as credit mortgage and title insurers, lawyers, brokers, and accountants. The bill also contains an exemption for car dealers from CFPA oversight if they do not engage directly in lending. A detailed summary of the bill written by the House Financial Services Committee can be found here.
In the Senate, little movement has occurred with Senators Dodd and Shelby still engaged in slow negotiations to formulate a larger financial reform bill.
It’s no surprise that the rhetoric surrounding the passage of the bill has been polarizing, given the usual atmosphere in the House. Statements by several Congressman are adding fuel to an already heated debate. Rep. Brad Miller recently said: “The Committee vote today is a rifle shot at abusive financial practices, not a shotgun blast that would hit community banks making an honest living from fair lending practices. It’s no surprise that the lenders with the worst practices are still fighting tooth and nail against this bill. The last thing they want is to have to make an honest living.” “Honest” counter-arguments to rhetoric like this have been complicated by the recent bonus payouts at several of the largest U.S. banks. At this stage, it’s still unclear if policymakers will find the middle-ground – a place that acknowledges that most lenders are not engaged in purposeful predatory lending, and most consumers do not need a nanny government to care for their every decision.
As these bills wind their way through Congress, subject to floor amendments and the conference process, it’s hard to know just whatsort of bill will emerge. Certainly, if there is one thing Washington is good at, it’s adding beaurocracy. Here at e21, we’ll be watching this process closely to keep you up-to-date and help separate the facts from the loftly rehetroic. We’ll leave you with this chart from the Consumer Federation of America. Sure, the top chart looks preferrable. The question, however, is whether the U.S. government in an effort to streamline the process will actually make it more cumbersome and duplicative.
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Consumer protection or more red tape?