Consumer Credit Protection Proposal

Introduction

The United States is currently experiencing difficult economic times. The financial problems faced by the nation are clear indicators of the poor condition of the economy. Predatory lending and no-documentation loans have created a housing crisis, and weak oversight by federal regulators has allowed unsafe mortgage bonds to be sold to investors (Hall). In addition, banks began padding their balance sheets in 2008 by charging consumers credit card fees that were hidden in the fine print of their contracts. Clearly, American consumers are in need of protection from financial deception. The Obama Administration's recent proposal for a new Consumer Financial Protection Agency seeks to solve this problem. Although the proposal has good intentions, the implications of its content are alarming and could prove to have a negative impact on consumers and businesses. Only through careful revision will this proposal gain acceptance from its opponents.On June 30, 2009, the Obama Administration released the 152-page legislative proposal for the new Consumer Financial Protection Agency (CFPA). Under the proposal, this new agency would have substantial "regulatory authority over all financial products and services, supplant the authority of existing agencies to promulgate regulations related to consumer protection, and carry far-reaching implications for any institution or person engaged in the financial services industry" (Ransom).Advocates of the new CFPA argue that the agency will guard Americans from abusive lending practices, which were the very cause of the current financial crisis (Dennis). These dishonest practices include undocumented mortgage applications, poor disclosure of loan terms, predatory credit card interest rates, and deceptive advertising. While protecting consumers, the proposal continues to encourage financial innovation. President Obama stated in his speech to the financial industry at Federal Hall in Manhattan that the "lack of clear rules in the past meant we had innovation of the wrong kind" and that "by setting ground rules, we'll increase the kind of competition that actually provides people better and greater choices, as companies compete to offer the best product, not the one that's the most complex or confusing" (McGrane). Though there are clear benefits from the proposed agency, the broad scope of its power could have negative effects on consumers and businesses alike.

Summary

According to Anthony Sabino, a Mineola lawyer and professor of law and business at St. Jo's University in Jamaica: "It's human nature that when you have a crisis we must change thingsbut instead of a viable solution for the long term, you end up with a slapdash, sloppy fix that doesn't really do a lot of good, and does more harm than good" (Morris). Opponents fear that the new policy would actually restrict consumer choice and make it more difficult for people to get credit (McGrane). The CFPA could also possibly harm small businesses and their ability to get credit. According to an article from the online newsletter The Financial, a recent Chamber's Study conducted by economist Thomas Durkin found that the CFPA "would likely restrict or eliminate altogether small business access to credit, and increase the costs of the credit they would be able to obtain[resulting] in business closures, fewer start-ups, and slower growth, ultimately costing a significant number of jobs that would either be lost or not created" ("U.S. Chamber Says Consumer Protection Agency Proposal Won't Enhance Consumer Protection").Financial institutions such as banks and credit card companies could also face negative consequences. The main concern for banks is the elimination of national bank preemption. Opponents argue that the new agency would "force national banks to comply with state consumer protection laws," which would limit product choice and raise costs (Hopkins). Under the new proposal, each of the 50 states could potentially have its own consumer protection laws on a range of topics, though many doubt that states will need to enforce their own laws. According to Mark Pearce, the North Carolina bank commissioner: "If the federal standard is a good one, the states won't actby having a floor, not a ceiling, it ensures we will reach a good minimum standard at the federal level" (Hopkins). In addition, separation of consumer regulation from prudential regulation as presented in the proposal could damage the financial industry. By separating consumer regulation and requiring consultation by financial institutions with the CFPA, resulting decisions may decrease product attractiveness and divert business from these institutions. Michael Barr, the Treasury assistant secretary of financial institutions, said that consumer protection exams would be risk-based (Flitter). This could mean a potential break for the smaller banks, with more attention on larger banks and nonbanks. According to Ellen Seidman, a former director of the Office of Thrift Supervision: "The beauty of focusing on consumer protection is they will hopefully prioritize their resources under at least two dimensions, namely what kinds of products and potential abuses do we have here and what kinds of volume is it being done in" (Flitter).Clearly, there are both positive and negative aspects to the new CFPA proposal. A key question in the debate is: "Can the government make people any more intelligent and responsible about borrowing money than, say, about the food they eat? Or would 'protection' in this case mean banning altogether any products that agency bureaucrats decided weren't fit for the lowest common denominator of potential users?" (Petruno). Representative Jeb Hensarling of Texas says that though the bulk of CFPA opponents are Republicans, the Republican party does "support the idea of simplifying disclosure forms for loans and other credit products" but that the "CFPA would hurt consumers by inevitably quashing innovation and choice" (Petruno). In addition, Hensarling remarks that if the CFPA had existed 25 years ago, ATMS, frequent flyer miles, or debit cards would probably not be in existence. Clearly, there should be a proposal revision. According to Treasury Secretary Timothy F. Geithner: "There are lots of different ways to make sure that you don't create too much unbridled authority that would be damaging to what's an important part of our financial system" (Lengell). One revision is offered by House Financial Services Committee Chairman Barney Frank. His revised plan would still create a powerful new agency that would protect consumers financially, but would scale back the plan in regards to the banking industry. Under Frank's revised plan, banks would not be limited to the administration's proposed "plain vanilla" financial products such as 30-year, fixed-rate mortgages, but would rather be allowed to continue with more innovative and "exotic" products.

Conclusion

I feel that the Consumer Financial Protection Agency proposal is a promising solution to the financial problems in the United States, but that it should be revised in order to limit the current broad scope of agency power. Only through limiting the agency's power over consumers and businesses will opponents be satisfied and willing to accept this new proposal.American citizens have always been characterized by their freedom. This freedom should include consumer choice. Hensarling's statement that the existence of the CFPA 25 years ago would have prevented the emergence of ATM's, frequent flyer miles, and debit cards is quite alarming. Financial protection is important for consumers, but the initial decision should lie with them. Most people would rather make their own choices, even if proven wrong, and learn from them than have someone dictate what they should or should not do initially. The CFPA policy about consumer protection should be more lenient and offer financial help through the form of advice and consultation, rather than strict enforcement of rules. Citizens will respond much better to this approach.In addition, policies toward businesses and financial institutions should also be revised. If small businesses are denied access to credit, then many entrepreneurs will fail to achieve their goals and many workers will be without jobs. Instead, businesses should be analyzed individually according to their needs, and should be rewarded with credit when deserved. Financial institutions should indeed be regularly audited and regulated in order to prevent financial deception. However, the CFPA should focus on the consumer protection factor rather than strict regulation of all financial institutions. Risk-based regulation (focusing on the larger institutions) is logical. I do not understand why small financial institutions should suffer from the mistakes of larger ones. Furthermore, strict regulation would prevent financial institution growth and innovation, and this is also not fair. It is not necessary to regulate the financial institutions this much, but rather just focus on the consumer protection aspect.The CFPA proposal with revisions could be very beneficial for our financial condition and, eventually, the economy as a whole. However, there are plenty of ways to ensure consumer protection without creating an all-too-powerful and controlling entity. If the Obama administration will listen to the feedback of American consumers and businesses, then perhaps all can reach an agreement on an agency with just the right amount of power to bring the country out of its current state of financial crisis.

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