Tuesday, January 19, 2010

Is a New Consumer Financial Protection Agency a Good Idea?

A bill that would create a new and far-reaching arm of the executive branch has passed the House of Representatives.  It has been forwarded to the Senate for approval.  If passed, a new federal consumer protection agency will be created that focuses only on "financial services."  So far, the term "financial services" remains a bit fuzzy; however, the bill clearly states money-lenders, payday loan companies, and mortgage brokers will be included under its jurisdiction. Admittedly, the business practices of these industries needs closer scrutiny.  As the Federal Reserve and Securities Exchange Commission focus on controlling the industry as a whole, consumer protection can sometimes fall by the wayside.  The FTC's jurisdiction does not reach many financial services (including banking), and therefore cannot protect consumers from several predatory practices.  With the economic crisis still lurking in consumers' minds, scam artists and financial predators are constantly scheming to exploit related fears.  The BBB has processed countless complaints and inquiries on credit repair organizations accepting advance payments, payday loan and short term loan companies charging 500% or more in interest, lenders withholding vital information during sales, mortgage fraud, investment scams and other financial services.  Despite the considerable time government agencies and the Better Business Bureau dedicate to protecting and educating consumers, predatory financial services remain active and abundant. Everyone (FTC and other agencies, Congress) agree some government action needs to make consumer protection more efficient.  Congress and President Obama believe the best way to do this is to create a new agency dedicated solely to consumer protection against predatory financial services.  But is it a good idea?

Most businesses predictably believe they do not need further oversight or regulation.  Lobbyists have swarmed Washington to fight the bill.  The automotive industry recently won a major victory by influencing the House of Representatives to exclude the Auto-Financing industry from further regulation.  Automotive companies argued that after such a difficult year in the industry, they could not afford further burdens. Unfortunately, the BBB processes many complaints on auto-financing. When the economy turns around and automotive companies are again successful, they will still be exempt from oversight and regulation under this bill.  If we're going to have a bill that protects consumers from financial services, there is no good enough reason to exclude auto-financing, the one service that nearly all Americans are exposed to.

The new Consumer Financial Protection Agency (CFPA) will acquire authority over financial institutions from several other federal agencies.  Opinions on the wisdom of this are polarized. By pulling authority from other agencies, we lose the experience of other agencies.  The CFPA will be thrown into the consumer protection world without experience or expertise.  The agency will be forced to learn in the field, making the long process of learning even more difficult. That being said, all agencies have to learn the ropes at some point. There's no way of avoiding it. And, by making financial services regulated and overseen by one agency, it is less likely that large numbers of consumers will continue to fall into gaps between jurisdictions.

Financial industries believe the bill is harmful.  Some of their concerns are legitimate. According to the bill, the CFPA can require businesses to submit financial reports at will.  It's a safe bet that the Agency will not request extensive financial records from innocent companies because no one, including them, wants to do more work than necessary.  However, this will put a burden on businesses to keep their records in an easily accessible format for the purposes of compilation and submittal to the Agency.  Also, privacy is only guarded against by "reasonable assurances of confidentiality."  Because the bill doesn't define "reasonable" or "confidential" when regarding inter-agency sharing, it probably doesn't instill much confidence into defenders of the Fourth Amendment.

In the end, there's no way to know how successful the CFPA will be until it has been around a while. And that is if it ever exists at all.  If the new agency reduces predatory financial practices, without too many hurt feelings, then it is a success.  If it violates our privacy and harms honest business at no gain, then it is an obvious failure. We'll just have to wait and see.

1 comment:

  1. I think excluding automotive financing from this bill makes this legislation worthless. You're right, few American adults have not financed an automobile. And predatory lending is a big problem in that industry.