Waters: One agency, two goals
President Barack Obama went to Wall Street earlier this month to talk about the need to reform the regulation of the nation's financial system to prevent a future crisis. I was happy that he emphasized the importance of protecting American consumers from risky, deceptive and costly financial "products" — loans with unpredictable, soaring interest rates; unsound investment schemes; credit cards with high fees, and the like.
For too long, consumer financial protection has been too weak, and the result has been a financial crisis that has devastated the economy and caused significant pain to millions of American families. Homeowners who were deceived by predatory lenders or whose adjustable-rate mortgages reset to unaffordable rates have been forced into foreclosure. Seemingly solid and stable Wall Street institutions have been brought down by toxic securities made up of unpaid debt.
While economists, analysts and policymakers are still investigating and debating the causes of this crisis, we have already learned some tough lessons as have our constituents who have seen their 401(k) retirement savings plummet and their credit card interest rates and fees soar. Of course home values have also dropped considerably, and many families are struggling to pay the mortgage and hold onto their home.
A strong regulator focused on consumer protection and with the authority to make and enforce rules could have prevented this crisis by blocking predatory products and by sounding an early alarm when consumers got into trouble. That is why it is critical that we come together to pass this important cornerstone of financial reform and create a Consumer Financial Protection Agency (CFPA).
As Congress considers legislation that will create and shape the CFPA, I believe we must keep in mind the following principles: The agency must consider the full scope of the financial system as it makes rules both to protect consumers and ensure the safety and soundness of banks. The CFPA must be able to monitor "non-banks" — the financial institutions that more and more people are turning to as alternatives to traditional banks. Finally, we must develop guidelines to allow the federal government to work in partnership with the states on consumer protection.
Among its various responsibilities, perhaps the most important for the CFPA will be rulemaking. The current financial crisis highlighted the fact that the many government organizations assigned to oversee financial institutions and protect consumers did not focus on those responsibilities. As a result we need to make a substantial change transferring responsibility for consumer protection to an agency solely dedicated to this purpose. Giving the CFPA this role means that rules will be written in a timely and useful manner and violations of these rules will be identified and dealt with accordingly.
The new agency should not only make rules to protect consumers but also needs to have the ability to examine lenders and to enforce the rules. Investigating possible violations will not only hold banks accountable but also enable the agency to detect potential wrongdoing or weaknesses in the system and then intervene. The banking system must adhere to strong loan standards, and that includes making sure products aren't designed to trick consumers, nor send them into bankruptcy.
Financial Services Committee Chairman Barney Frank (D-Mass.) has recently shared a new proposal which would make changes to the CFPA bill he already introduced, and I think they represent a step in the right direction. Any CFPA legislation should create specific oversight of the shadow banking industry. This includes nonbank actors such as the predatory loan originators, payday lenders and remittance providers who prevent hardworking Americans from achieving financial stability. I strongly support protection for millions of low-income and minority Americans to keep them from being victimized by unscrupulous lenders.
I also believe we must ensure that the states and the federal government work together on a foundation for consumer protection. The federal government should set a strong foundation, allowing states to implement stronger regulation if they desire. However, states should not be able to weaken the benchmark set by the federal government and undermine consumer financial protection.
In my home state of California, one in every 144 homes received a foreclosure notice in August. Conditions are not much better in the states of my colleagues on the Financial Services Committee. Florida, Illinois, Georgia and Idaho are all among the 10 states most devastated by foreclosures. As the housing crisis has been compounded by extensive job losses, more Americans are coping with high levels of debt. Consumers are frequently learning that they must interact not with the person who sold them a financial product, but with the person who collects on the debt. Therefore, we must not only protect consumers from entering into predatory loan contracts, but we must also work to protect them from abusive collection tactics. Consumer protection requires the CFPA to be an active watchdog, helping borrowers beyond the point of sale.
A lack of effective consumer protection has been a significant factor in the current economic crisis. The CFPA — a standalone agency focused on consumer financial protection — will prevent predatory loans and other abuses that harm families and if left unchecked would inevitably lead to another financial meltdown.
Waters is a senior member of the House Financial Services Committee.