Debunking Attacks on Consumer Protection

The banking industry, led in part by the American Bankers Association (ABA), has been launching an assault on the proposed Consumer Financial Protection Agency (CFPA). In testimony before Congress and letters to bank CEOs, the trade group has been spreading myths about the CFPA, which would promote fairness, transparency, and real disclosure for financial products.
 
Woodstock takes on these myths one by one.

 
ABA Myth #1: Consumer regulation should not be separated from safety and soundness regulation.
 
False. This is, in effect, an argument for the status quo, which is not only ineffective but costly and fragmented. As it stands, seven different federal agencies have some sort of regulatory authority over consumer credit. Existing regulations are not integrated, and the result is a patchwork regulatory framework with glaring gaps. The CFPA can streamline and coordinate all consumer protection regulations, making the process much more effective and efficient.
 
As we pointed out last week, the existing bank regulators have not adequately implemented existing consumer protections regulations.  In many cases, consumer protections have taken a back seat to safety and soundness, as regulators ignore the deceptive-by-design nature of a financial product simply because it is profitable or has sufficient loss reserves.  For example, even though the Federal Reserve was given broad authority to crack down on subprime lending in 1994, it failed to take action until 2008.   
 
 
ABA Myth #2: Consumer agency will not close existing gaps in regulation; it will only add another bureaucratic layer.
 
False.  The CFPA will close existing loopholes and ensure that consumers are protected from unfair and deceptive products, regardless of the type of company selling them.  To the consumer looking for a mortgage, credit card or checking account, banking charters and licensing jurisdiction matter very little.  What does matter is that the product they receive from one lender carries the same protections as a product from any other.   Exempting one portion of the financial services industry, as the ABA seems to recommend, would simply create a new loophole where abusive practices could flourish.
 
Besides, the CFPA may actually lighten banks’ regulatory burdens. The “plain vanilla” contracts that the agency would promote would likely serve the needs of 95% of consumers. As Elizabeth Warren points out, these contracts are a “regulatory safe harbor”—just by using them and filling in a few blanks about specifics, banks fulfill their regulatory requirement.                                            
 
 
ABA Myth #3: Consumer agency will have unprecedented authority to control the products and services offered by banks and will limit consumer choice.
 
False.  Clearly, choice is not the issue here. What consumer would choose a harmful, exploitative financial product if they knew that a more reliable option were available? If product terms were explained in a way that people could understand, and exotic products were presented alongside “plain vanilla” ones, then consumers would have real choice based on full information and comparison shopping. Information and competition are, of course, what make markets work—not confusion and deception.
 
 
ABA Myth #4: Consumer agency would disrupt interstate commerce in financial products and services.
 
False.  The states’ right to enforce anti-discrimination laws against national banks was recently upheld by the Supreme Court, CFPA notwithstanding. The ABA is complaining to the wrong people.
 
 
ABA Myth #5: Who will pay for the consumer agency? The CFPA will put an unfair burden on depositories.
 
False.  Previously unregulated financial companies would also be subject to regulation and the associated costs, depositories would not carry the full responsibility for funding the CFPA.  Currently-regulated depositories already pay levies for both consumer protection and safety and soundness regulation. The responsibility for consumer protection will simply be shifted to the CFPA.  Finally, consolidating and streamlining the current patchwork of consumer protection regulations would likely result in a more efficient allocation of resources.
 
 
ABA Myth #6: We should simply enhance consumer protection within existing agencies.
 
False.  Enforcing consumer protections is not, and never will be, a serious priority for the current bank regulators.  Their sole focus, and rightfully so, should be ensuring financial institutions are stable and well-capitalized. 
 
Freeing bank regulators from the responsibility of consumer protections enforcement, and shifting that responsibility to the CFPA, will ensure that all consumer protection laws are adequately enforced.  There are, of course, improvements that should be made to the CFPA—for example, it should be charged with regulating and enforcing the Community Reinvestment Act and fair lending laws—but these are not the improvements that the industry wants. Their “improvements” are really exemptions and carve-outs that would gut the agency of any real power it would have to protect consumers.