The Need for a Consumer Financial Protection Agency
This Congress is about to embark upon the adoption of regulatory reform. We have had an economic meltdown and a subprime mess, and we discovered that our regulatory agencies were asleep at the wheel. We discovered that there had been deregulation that led us to the point of this economic meltdown.
Judging from the proliferation of products such as subprime mortgages and payday loans, our current regulatory framework inadequately protects consumers. There are many reasons why we need a new consumer financial protection agency. There will be a comprehensive piece of legislation that will talk about how we do credible regulatory reform. But of all that is in the proposed legislation that is being developed, we are getting a pushback from the financial services community on the consumer financial protection agency.
Why is that? Why is it that given what we have gone through the financial services community can boldly and barefacedly come before us and talk about why a consumer financial protection agency is a bad idea?
I suppose one of the reasons is jurisdictional. There are several types of consumer financial products which, because they are offered by non-banks, fall into what may be classified as a "shadow banking industry." These products and institutions escape Federal regulation yet often lead to Federal problems, such as our current economic and foreclosure crisis.
A prime example of this is mortgage servicing. Mortgage services is an important part of our housing market, and consumers often have more contact with their mortgage servicers than they do with their mortgage broker, real estate agent or bank combined. However, lately, many servicers have been unable to properly assist consumers due to lack of capacity or perhaps just the will to do so.
The servicers are the ones that are supposed to be doing loan modifications. They are supposed to be helping the consumers to unwind the mess that many of them have found themselves in because of the predatory lending.
There is currently no Federal agency with specific jurisdiction over the mortgage servicing industry, and therefore, no mechanism for anyone to address this pressing issue. The proposed consumer financial protection agency would bring nonbanks who offer financial services to and interact with consumers into our regulatory system.
Another reason we need a consumer financial protection agency is to protect consumers from complicated products and hidden and predatory fees. According to Harvard Professor Elizabeth Warren, the average credit card offer now comes bundled with more than 100 pages of fine print. Buried within this fine print are provisions about restrictions, teaser rates and penalties. This fine print is nearly impossible for consumers to make informed decisions and pick the credit card or other lending product which is right for them. This leads some borrowers to be trapped in credit cards or loan products with hidden and abusive fees. This agency could solve this problem by working with the industry to reduce fine print and hidden fees.
The final reason we need this new agency is stability. Our financial markets are built on consumer lending. Our current crisis began when collateralized debt obligations and mortgage-backed securities were packed with exotic products, such as no-doc loans and liars loans. It was exacerbated as consumers were continually squeezed with excessive penalties and fees from bank products, reducing purchasing power and leading families everywhere to make tough decisions. A strong regulator, one which focused solely on consumer safety and championed simpler disclosure and products, could have prevented all of this.
We need a consumer financial protection agency to deal with this kind of crisis so that it never occurs again.