"Consumer protection will have an independent seat at the table in our financial regulatory system," says Treasury Secretary Timothy Geithner recently while discussing President Obama's proposal to form a new watchdog agency. "By consolidating accountability in one place, we will reduce gaps in federal supervision and enforcement, drive greater clarity in the information consumers receive around products they are sold, set higher standards for those who sell those products and promote consistent regulation across the system."
The idea behind new watchdog legislation is to insulate people from their own bad decisions or lack of education by eliminating risk. If the President has his way, the Consumer Finance Protection Agency (CFPA) will be superimposed over many aspects of our financial lives from credit card activity, to mortgages, to tax preparation, and much more.
Currently the existing consumer protections that govern these areas of our financial lives are covered by over a dozen different laws and overseen by a various agencies entrusted with regulation. President Obama wants to concentrate power in the hands of the CFPA for the existing laws, and add new regulations as well. Towards that end, he has submitted to Congress a 150 page proposal to establish the CFPA. And according to Representative Barney Frank, the Chairman of the House Financial Services Committee, this is going to be pushed through in spite of the misgivings and warnings of many onlookers.
The draft legislation will amend several existing statutes, including:
- Consumer Leasing Act of 1976
- Electronic Funds Transfer Act
- Equal Credit Opportunity Act
- Expedited Funds Availability Act
- Fair Credit Billing Act
- Fair and Accurate Credit Transactions Act
- Federal Deposit Insurance Act
- Federal Reserve Act
- Federal Credit Union Act
- International Banking Act of 1978
- Fair Debt Collection Practices Act
- Gramm-Leach-Bliley Act
- Home Mortgage Disclosure Act
- Home Ownership and Equity Protection Act of 1994
- Real Estate Settlement Procedures Act
- Truth in Lending Act; Right to Financial Privacy Act of 1974
- Secure and Fair Enforcement for Mortgage Licensing Act of 2008
- Farm Credit Act
- Truth in Savings Act
How will this affect individuals? Assuming the proposal does pass, here are the key areas of daily life that will be brought under the watchful eye of the Consumer Finance Protection Agency.
The Administration wants mortgage lenders to offer what it calls a "plain vanilla" loan, as the default mortgage. That way, less sophisticated borrowers will not stumble over their own lack of knowledge into a more creative loan that may or may not suit their pocketbooks better. Much the same way as parents of toddlers often limit the choice of ice cream flavors to vanilla, chocolate, or strawberry in order to avoid confusion, the fed wants to take the role of the parent and shield us from the possibility of a bad decision by channeling us automatically in a plain vanilla mortgage, that is, a 30-year fixed loan. Other "flavors" will be available, but the default offering will be vanilla.
Though the idea is to eliminate risk for the unsophisticated borrower, one Wall Street bank executive told reporters that this concentration of power in the hands of one agency might lead to the government forcing lenders to loan to consumers with shaky credit, even if doing so will jeopardize the stability of the bank. This does not require a stretch of the imagination, since for decades, Democrats including Barak Obama, Senator Chris Dodd, and Representative Barney Frank -- as well as a handful of Republicans - pressured lenders to drop the long-held industry standards for judging credit-worthiness and begin making subprime loans, suggesting that the tougher standards were racist.
In spite of their own roles in the housing crisis, Frank and Dodd insist that this watchdog agency must and will become reality. Dodd told reporters "It is unbelievable that some of the same irresponsible actors that helped create the current financial mess would argue that we are doing too much for consumers."
Republicans say that putting a stranglehold on the consumer market will limit options for buyers and cause banks to raise prices of financial products, such as mortgages. It will also give buyers a false sense of security, implying that they don't need to exercise independent judgment because the government is doing that for them.
The White House proposal includes putting the CFPA in place as the watchdog over how credit cards issuers do business, which includes administering the recently enacted Credit Card Accountability Responsibility and Disclosure Act (CARD). CARD's sweeping reforms are aimed at preventing sudden interest rate hikes and other unpleasant surprises. But it also prohibits credit card issuers from offering credit cards to people under 21, even if they can afford to pay the bills (though there are ways of getting around this law, such as getting a cosigner or proving sufficient income independent of their parents).
Regulation of Tax Preparers
Not long ago IRS Commissioner Doug Shulman vowed to have a new set of regulations in place to assure "uniform and high ethical standards of conduct for tax preparers," as yet another way of protecting the consumers who patronize them. This regulation includes the imposition of national standards for education and licensing. Many have expressed the belief that this is a form of overkill which is an insult to the vast majority of honest, hard-working tax preparers who hold fast to high standards without having their arms twisted. And many point out that the industry can and does police itself to some extent. Nearly 40 states already require continuing education in ethics, and the AICPA monitors the behavior of CPAs, without the strong arm of the IRS, or perhaps in the near future the CFPA, enforcing the rules.
Other areas that the CFPA is likely to control include high rate payday loans, and the terms on saving, checking, and debit card accounts, and overdraft charges. One of the most controversial areas that Obama is seeking to control is that of personal savings accounts. He has proposed a plan intended to force us to save money from our paychecks and tax refunds, by siphoning money automatically into government-created savings accounts. It's not yet clear if this plan will be part of the CFPA's jurisdiction or not.
More from the Critics of the Proposed CFPA
Though many consumer protection agencies have lined up to support regulating our decision making process, there are plenty of critics as well. Some are looking at this as the Obama Administration's attempt at behavior modification on the general public, designed to eliminate risk that we might accidentally make what the government would categorize as inappropriate decisions as a result of lack of education and common sense.
"The proposed CFPA appears to be premised on the idea that Washington is better at making financial decisions for all Americans than leaving that choice up to individual Americans," Rep. Spencer Bachus (R-Ala.) to Washington Post reporters. Bachus is the ranking Republican on the House Financial Services Committee.
Bachus adds, "The best way to protect consumers is not through the creation of another bureaucracy accountable to no one but by consolidating the regulatory system and holding regulators accountable."
Steve Bartlett, the president of the Financial Services Roundtable told reporters that the CFPA will "stifle innovation and increase confusion" among consumers.
The Treasury Department defends its proposal by saying that the goal is not to rule with a heavy hand or to overburden financial institutions. The CFPA would enforce compliance by charging penalties. If the Obama Administration succeeds in passing the formation of the CFPA, it will be run by a five-member board, four of whom will be nominated by Obama and confirmed by the Senate. The fifth member would be the National Bank Supervisor.
Some are calling this proposal the most sweeping rewrite of federal rules since the 1930s.