Financial protection agency: Monster, savior or muddle?


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The Obama administration’s proposed overhaul of financial-system regulation would create a Consumer Financial Protection Agency to oversee many of the financial products and services Americans use daily.

The new CFPA ‘should have broad jurisdiction to protect consumers in financial products and services such as credit, savings and payment products,’ the administration says in its white paper on proposed reform.

The goal, in no small part, would be to protect consumers from themselves. Like how? The White House uses this example:


‘The CFPA should also have the ability to act comprehensively to address emerging consumer protection concerns. For example, under the current fragmented structure, the federal banking agencies took until December 2005 to propose, and then until June 2007 to finalize, supervisory guidance on consumer protection concerns about subprime and nontraditional mortgages; the worst of these mortgages were originated in 2005 and 2006. A single agency, such as the CFPA, could have acted much more quickly and potentially saved many more consumers, communities and institutions from significant losses.’

Yet plenty of people who took subprime loans knew very well that they were crawling way out on the risk limb. They wanted a piece of the action in the phenomenal party that was going on in the housing market.

Had a risk-conscious CFPA been in place in 2005, would it have had the courage to, in effect, remove the punch bowl from the housing bash? Would CFPA restrictions on subprime loans have been OK with those in Congress who believed that the subprime industry was merely providing credit to many lower-income Americans who had been shut out of homeownership?

The administration says the mission of the CFPA would be to make sure that:

-- consumers have the information they need to make responsible financial decisions; -- consumers are protected from abuse, unfairness, deception or discrimination; -- consumer financial services markets operate fairly and efficiently with ample room for sustainable growth and innovation; -- traditionally underserved consumers and communities have access to lending, investment and financial services.

But it’s easy to see how those missions could be at cross-purposes. In any case, the scope of this agency would be vast -- which terrifies some people, and thrills others.

‘The CFPA will be a massive new agency that will impact everyone in the United States in some form,’ writes Andrew Busch, a markets strategist at BMO Capital Markets in Chicago. ‘Providing this much power to one agency is truly frightening as they will get to set the rules and pick the winners/losers for the financial sector.’


The counter argument, from the California Public Interest Research Group:

‘The CFPA would ensure the safety, fairness and sustainability of credit. The agency would have broad powers to ensure that credit and payment products do not have predatory or deceptive features that can harm consumers or lock them into unaffordable loans. The president’s proposal addresses a glaring oversight in the regulatory structure by creating an agency designed to monitor the safety of financial products from the viewpoint of the consumer. The current system has treated consumer protection as secondary or even in direct conflict with ensuring the soundness of financial institutions.’

-- Tom Petruno