Consumer Protection Agency Moving Forward

Sen. Christopher Dodd, chairman of the Senate Banking Committee, said today that he believes Congress will pass a proposed Consumer Financial Protection Agency (CFPA), despite concerns that this kind of bureaucracy would hurt consumers more than help them. The President and congressional democrats are seeking to help families and individuals they believe have been harmed by predatory mortgages and abusive credit card policies.

But GOP ranking member on Banking Sen. Richard Shelby has said, he is concerned about the plan: “Implied in this belief is the notion that some people, such as government bureaucrats, can make informed decisions about the value of products and services while others, such as the American consumer, cannot. In other words, ‘Yes we can’ has become ‘No you can’t.'” Other Republicans have said the CFPA would stifle innovation and restrict consumer choice.

The idea of a CFPA has sparked intense criticism from the U.S. Chamber of Commerce, which believes this agency would step on the toes of existing regulators and discourage consumers from doing their own research into the benefits and risks of a product. President of the USCC’s Center for Capital Markets Competitiveness David Hirschmann said, “We do worry that if there’s product-by-product approval by stand-alone consumer protection agency, it will imply to consumers that these products are safe and that they don’t have their own responsibilities for due diligence.”

Ultimately this comes down to issues of personal responsibility. Yes, there were people screwed over by companies and others have been cheated. But many people simply did not do the proper diligence in looking into the mortgages and contracts they were signing. As I wrote on the blog a few weeks ago in defending complex contracts, perhaps we can look at the fine print on a credit card application as the minimum threshold for being determined responsible to manage credit. Instead of creating a Consumer Financial Protection Agency, Congress should simply look to bolster the current consumer protection laws and recognize that people will make financial mistakes even when contracts are clear.

Other critics believe a CFPA would simply be ineffective. Megan McArdle wrote last month, “The problems that are now bringing consumers low are not the things hidden in the fine print. They’re the things that were right out there on the front page: their interest rate. The size of their loan relative to their income. The fact that the interest rates on adjustable rate loans can adjust upward. The people who took out Option ARMs or borrowed $40,000 in credit card debt on a $45,000 income were not unaware of these things. They ignored them. [The CFPA is] not a terrible idea, but I’m skeptical that it will have any effect.”

Banks are concerned that the consumer protection agency, which would not be tuned into other aspects of the market like the Fed is in its consumer product oversight role, would dramatically increase the costs of compliance (similar to Sarbanes-Oxley). Still, advocates for a CFPA believe that consumers were hurt during the crisis by complex mortgage agreements and confusing investment products and believe an agency is necessary to bring stability to the financial products market.