For years, financial institutions have had the ability to do business under several different charters, giving them the option to choose the regulator that sets the lowest consumer protection standard. Since regulators are funded from the fees that regulated institutions pay, there was little incentive to drive away banks by introducing stringent consumer protections. Cracking down on banks meant losing the fees that kept the lights on.
Even in a country where skepticism about government intervention crosses socioeconomic barriers, 57% of Americans support the creation of a “new federal agency to protect consumers who purchase banking and other financial products and services.” This approval was highest among groups who are often the victims of deceptive-by-design financial products: African Americans (79%), Latinos (70%), young adults under 35 (70%), and low-wealth persons (69%). These groups know firsthand
We are easily confused by having too many choices and too many pages of fine print. We are motivated by unconscious cognitive biases. Unscrupulous financial services providers play to our human weaknesses with products that trap consumers in a cycle of debt.
Clearly, as new consumer protections are debated, lawmakers must ask some tough questions, not the least of which is: Which deserves more punishment—a misplaced trust in the process, or an active intent to deceive?
The agency would require understandable disclosure, not the reams of fine print that has trapped business owners in unfavorable credit card contracts. It would prohibit unfair and deceptive practices, not let hazardous products like automobile title loans, which many businesses rely on to manage cash flow, slip through regulatory loopholes. Finally, it would require that lenders offer straightforward financial products, such as transparent credit cards and small business loans, alongside the complicated and price-shrouded products that crowd the marketplace.&n
We applaud their action to protect consumers from predatory, abusive, and unfair financial practices. Other public servants should follow suit in voicing support for this legislation, which would improve the lives of their constituents and strengthen communities by helping to break the cycle of debt.
Future regulations will deal with other provisions of the law that take effect in February and August of 2010.