06.28.10

Financial Reform Bill, Part 7

Posted in Financial Markets, Politics and Policy at 10:32 pm

In this post I’ll address Section 1, entitled, “Consumer Protections with Authority and Independence”.

From the summary:

Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Here are the specifics:

STRONG CONSUMER FINANCIAL PROTECTION WATCHDOG

The Consumer Financial Protection Bureau

Independent Head: Led by an independent director appointed by the President and confirmed by the Senate.

Independent Budget: Dedicated budget paid by the Federal Reserve system.

Independent Rule Writing: Able to autonomously write rules for consumer protections governing all financial institutions – banks and non-banks – offering consumer financial services or products.

I’m still not convinced that the Federal Reserve is the right place for this sort of agency.

Examination and Enforcement: Authority to examine and enforce regulations for banks and credit unions with assets of over $10 billion and all mortgage-related businesses (lenders, servicers, mortgage brokers, and foreclosure scam operators), payday lenders, and student lenders as well as other non-bank financial companies that are large, such as debt collectors and consumer reporting agencies. Banks with assets of $10 billion or less will be examined for consumer complaints by the appropriate bank regulator.

Two points:

1. As expected, note the absence of auto dealers from this list. It was widely reported in the media that auto dealers lobbied hard to get an exemption and that appears to be correct. But why? Cars are the second largest financed purchase (after a house) most consumers will ever make. It makes no sense to exempt them from consumer protections.

2. What is the rationale for the $10 billion cutoff? If anything, it is the smaller, fly by night, operations that have tended to be the worst offenders in the past, why ignore them? This agency should have jurisdiction, within the confines of consumer protection, over all financial firms.

Consumer Protections: Consolidates and strengthens consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve, National Credit Union Administration, the Department of Housing and Urban Development, and Federal Trade Commission. Will also oversee the enforcement of federal laws intended to ensure the fair, equitable and nondiscriminatory access to credit for individuals and communities.

The objective here seems to be at odds with the $10 billion cutoff inserted in the previous provision. If you’re going to centralize, then centralize.

Able to Act Fast: With this Bureau on the lookout for bad deals and schemes, consumers won’t have to wait for Congress to pass a law to be protected from bad business practices.

If it weren’t for the failure of the regulators to act on these sorts of abuses in the past, despite it being within their jurisdiction to do so, that would be funny.

Educates: Creates a new Office of Financial Literacy.

Consumer Hotline: Creates a national consumer complaint hotline so consumers will have, for the first time, a single toll-free number to report problems with financial products and services

Nothing wrong with those two proposals, though I doubt anything meaningfull will result.

Accountability: Makes one office accountable for consumer protections. With many agencies sharing responsibility, it’s hard to know who is responsible for what, and easy for emerging problems that haven’t historically fallen under anyone’s purview, to fall through the cracks.

Works with Bank Regulators: Coordinates with other regulators when examining banks to prevent undue regulatory burden. Consults with regulators before a proposal is issued and regulators could appeal regulations they believe would put the safety and soundness of the banking system or the stability of the financial system at risk.

Clearly Defined Oversight: Protects small business from unintentionally being regulated by the CFPB, excluding businesses that meet certain standards.

This is all happy, feel-good type stuff. The best way to avoid turf wars between regulators is to consolidate regulatory agencies into a smaller number of them. While it may be tempting to try and address the problem by simply drawing hard lines between jurisdictions, financial innovation is very real and will blur the lines and create new products that slip through the gaps almost immediately.

Overall, consumer protection is a good thing, and there are positive aspects to the legislation in this regard, but this is hardly central to the objective of minimizing the probability of a repeat crisis.

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