The Case for a Consumer Financial Protection Agency

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When you buy a dishwasher, you know it probably won't explode. When you buy aspirin, you can figure out the side effects without an advanced degree. When you buy zucchini, you can feel confident it won't be toxic. And when you buy movie tickets, you can presume the terms of your purchase won't change after you leave the window.

But when it comes to financial products like mortgages and credit cards, you can't be sure of any of those things. That's the basic case for a Consumer Financial Protection Agency (CFPA), the centerpiece of President Obama's push to reform financial regulation.

The argument is that finance has become a Wild West of outrageous hidden fees, ridiculous fine print, deceptive come-ons and secret side deals designed to sucker us into predatory rip-offs we can't afford or escape. And the CFPA is supposed to be the new sheriff in town. It would be an independent agency empowered to write and enforce rules for financial products, so that banks would no longer enjoy lax consumer regulation — and nonbanks peddling loans from hell would no longer escape just about all regulation. It would be like a financial version of the Consumer Products Safety Commission (CPSC), the Food and Drug Administration (FDA) or even the Environmental Protection Agency (EPA).

Financial reform is complex, and it's hard for nonexperts to follow which proposals for a derivatives clearinghouse or systemic risk council have teeth and which are sops to the industry. One political attraction of the CFPA is its simplicity: you're for it or against it. After sketchy subprime mortgages helped crater financial markets, even laissez-faire ideologues like Alan Greenspan called for stronger regulations to curb abuses and stabilize the system. And given the well-documented outrages pervading the industry these days — exorbitant overdraft fees, late fees, nuisance fees and balloon payments buried in opaque legalese, slimy yield spread premiums that banks give brokers who push high-risk mortgages — it's awkward to argue against it.

Not impossible, though.

Wall Street is lobbying furiously to try to block the CFPA, and Republican congressional leaders have denounced the idea as big-government overreach that would harm consumers by stifling innovation — especially if bank basher (and TARP watchdog) Elizabeth Warren, the intellectual godmother of the agency, gets to run it. Some finance-friendly Democrats have been resistant as well. The new agency was included in the financial reforms the House of Representatives passed along party lines in December, but it has been a stumbling block as the Senate has struggled to put together a bipartisan bill, and even the House version was watered down a bit. Small banks were allowed to keep their old regulators; realtors and auto dealers were exempted from new regulation; a requirement that lenders offer "plain-vanilla" mortgages in addition to exotic products was scrapped.

Some retro critiques of the CFPA as a heavy-handed crimp on free markets reek of apologetics for an industry that's disturbingly reliant on gotcha games. That said, there are at least three plausible arguments — really, a three-part argument — against Obama's decision to declare the CFPA a non-negotiable element of reform.

The CFPA would actually weaken consumer protection.
Nobody is defending the recent performance of the Federal Reserve, the Office of the Comptroller of the Currency (OCC) or any of the other financial agencies with current consumer-protection duties. But that doesn't necessarily mean those duties should be transferred to a brand-new bureaucracy. As JPMorgan Chase CEO Jamie Dimon has been asking privately: If my legal department screws up, do I create a new legal department? Some bank lobbyists argue that consolidating all consumer protection in just one new agency would be like leaving just one rookie cop patrolling a highly complex beat. Critics like John Dugan, the head of the OCC, have warned that if consumer-protection duties are separated from the "safety and soundness" duties of traditional bank regulators, then both will suffer.

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