Do They Take Us for Schmucks?

After healthcare--if you can imagine an "after healthcare"--the next Big Fight in Congress will likely be over financial reform, particularly the proposed creation of a Consumer Financial Protection Agency (CFPA). The CFPA would focus solely on protecting consumers' financial interests--a task currently shared (with disastrous results) by several agencies whose primary focus is on monitoring the safety and soundness of financial institutions.

No longer would financial institutions be able to choose their federal regulator--if they have one at all--shopping for the one that is most accommodating to their interests.

No longer would the regulators depend on the very firms they are supposedly monitoring as a major source of funding.

And no longer would consumer protection be an afterthought--understaffed, under-funded, and absolutely underwhelming.

In contrast, the CFPA would, for example, focus on enforcement of fair lending laws through its Office of Fair Lending and Equal Opportunity. It would expand oversight to include non-bank firms, such as those in the mortgage market that issued many exotic loans people couldn't afford. It would ensure that products are more readily understandable, rather than 30 pages of legalese along with very fine print. And it would promote financial literacy efforts.

The House Financial Services Committee hopes to approve the CFPA the week after next. On Wednesday, the committee held a hearing to discuss Chairman Barney Frank's draft proposal. The best case for a CFPA was made by those offering their reasons for opposing it.

Those arguments ranged from the bizarre: "If [this] had been in effect a number of years ago we probably wouldn't have ATM machines, frequent flyer miles, and the list goes on," said Texas Congressman Jeb Hensarling. Ranking Member Spencer Bachus of Alabama claimed that the CFPA would lead to "less consumer protection."

To the inane: "Could you clarify to me the extent of [SEIU's] financial and programmatic ties to ACORN?" Congressman Patrick McHenry of North Carolina demanded of witness Anna Burger, secretary-treasurer of the Service Employees International Union. David John, senior research fellow, at the Heritage Foundation, said, "When you establish a new agency of this type... you're going to find yourself with people who are supposedly regulating but in reality they're far more concerned about finding things like where their desk is, and who their new reporting relationship is, etc. etc."

Finally, there was the You Must Truly Take the American People for Schmucks approach: Edward Yingling, president and CEO of the American Bankers Association (ABA), stated, "No real case has been made for... requiring additional enforcement on banks and credit unions; [or] a large increase in consumer regulatory powers." Yingling then took his handy shovel and proceeded to keep digging: "I think that our industry made a big mistake...We looked at what does it mean for our regulatory burden on banks and...it's because we have such a heavy burden, that we get paranoid about it. Sometimes for good reason. One of the lessons for the future is we can't just look at what's going on in our narrow interest, we have to look at what's going on in the economy and in neighborhoods...You have our pledge we're going to work with you to help solve this."

Yingling's colleague, Bill Himpler, executive vice president of the American Financial Services Association, seemed equally oblivious to his industry's credibility issue as well recent history. "I can assure this committee that finance companies are already heavily regulated," he said. "Like banks, finance companies undergo regular and vigorous examination by state regulators."

At one point, Democratic Congressman Melvin Watt told the financial industry reps--in the kind of overly calm voice any kid would recognize as masking a parent's desire to strangle him--that he felt "an absolute sense of exasperation for the positions you all have taken on this, which really have been we're gonna oppose it, and oppose it, and oppose it....You would continue to make [consumer protection] a step-child in the whole regulatory structure....You all are saying that we ought to be catering to your industry still, and I think that's unacceptable."

For those looking for more sound arguments grounded on this planet, there were indeed some compelling witnesses who testified on the need for a CFPA.

Janis Bowdler, a deputy director at the National Council of La Raza, said, "Deficient oversight failed Latinos, other communities of color, and those of modest means...Despite clear evidence that minority borrowers were paying more for credit and being steered into subprime credit when they qualified for prime, the trends went unnoticed by federal regulators...[We need] a new agency dedicated to consumer protection, product innovation, and equal access to financial markets."

The CFPA "would support if not require regulators to become more protective of consumers," said Hilary Shelton, director of the National Association for the Advancement of Colored People. "And it would make civil rights protections more of a key element in the regulation and oversight of financial services...We need [an] agency whose primary function is to provide some protection to consumers."

Michael Calhoun, president and chief operating officer at the Center for Responsible Lending, asked simply, "Who does the Congress want to trust with carrying out this authority? For me, a telling statistic...if you look from 2002 to 2008, the [Office of the Comptroller] did not make a single--a single--referral to the Department of Justice for equal credit violations. Now do you want to trust the authority back to them? Or do you want to try a different approach?"

"Even those financial institutions that were regulated had regulators who were looking at them from the perspective of what was good for the institutions, not what was good for the consumers," Burger agreed. "It would be good to have an agency that actually looks at the interests of the consumer first, as opposed to last."

Opponents of reform do still have two evergreen scare tactics to use on the American people--that compliance costs will be passed onto the consumer, and that this reform will somehow lead to greater instability in the safety and soundness of banks. I spoke with Chairman Frank about these issues after the hearing.

"Nonsense," Frank said about raised costs. "In the first place, that's what they said about the credit card bill. That's what they've said about every consumer agency. The administration of this will not add any cost, this is going to be transferred cost...[from] an existing agency."

As for the impact on safety and soundness, Frank said, "That's just something they say because they want to kill the whole thing...They haven't shown me a consumer protection piece of legislation that hurt safety and soundness: truth in lending, credit card bill. As a matter of fact, I think the right kind of consumer protection enhances safety and soundness. Selling people mortgages they shouldn't have gotten was one of the worst taxes on the safety and soundness of banks we've ever seen."

As moving and persuasive as pledges from the American Bankers Association and the American Financial Services Association are, I think this time around I'd prefer a CFPA whose sole mission is to look out for consumer interests.

It really shouldn't take too long for the new staff to find their desks and get up and running.