Of the many proposals the Obama Administration has put forward for redoing financial regulation, the simplest and most straightforward has got to be the creation of a Consumer Financial Protection Agency (CFPA). Maybe that explains why it's also the most controversial.
Banks hate the idea of a CFPA and reportedly plan to spend millions of dollars on TV ads and other efforts to thwart it. Members of Congress are griping about the way it steps on the toes of existing agencies they like. And those on the political right have taken to characterizing the CFPA as a classic case of Democratic regulatory overstretch.
My own opinion, after several days spent perusing the legislation there's a 152-page Administration draft and a 229-page bill introduced in the House by Financial Services Committee chairman Barney Frank is that the logic behind it is quite compelling. That doesn't mean it will actually work as advertised, especially after Congress is through with it. But it's an idea that deserves a chance.
The main thrust of the legislation is to take the consumer-protection responsibilities (and consumer-protection regulators) now housed at the Federal Reserve and other banking agencies and give them their own new home. In trying to balance the joint responsibilities of protecting consumers and keeping banks safe and sound (that is, profitable), bank regulators have in the past decade failed at both. So the idea is that if we create an agency with consumer in the name and a clearer focus, we'll have a better shot at protecting consumers from dangerous, deceptively packaged financial products and keeping banks from lending themselves into oblivion.
This line of reasoning is most closely identified with Elizabeth Warren, a Harvard law professor and the current chairwoman of the congressionally appointed committee overseeing the Treasury's bailout efforts. In a 2007 article in the journal Democracy, Warren argued for what she called a Financial Product Safety Commission. But the idea isn't exclusive to her. Canada, which did not suffer the subprime woes of its southern neighbor, created a consumer financial agency in 2001. Australia and the Netherlands have taken the more ambitious step of consolidating all consumer and market oversight under one financial regulator while leaving soundness to another. Last year when he was still Treasury Secretary, Hank Paulson endorsed this approach in his blueprint for regulatory reform.
The most reasonable objection the banks have to the CFPA is that its reach is too limited, hence subjecting banks to burdens other financial firms won't bear. Products regulated by the Securities and Exchange Commission and Commodity Futures Trading Commission would be exempt from CFPA oversight, as would most insurance companies, which are regulated by the states. And while the CFPA would have authority over anyone extending credit to consumers, the first line of regulation for nonbanks such as mortgage brokers and check-cashing firms would remain the states. American Bankers Association chief executive Edward Yingling argues that because of this, the playing field would still be tilted in favor of the nonbanks, and he may be right. But it would at least be more level than it is now.
Once the TV ads start running, the debate will probably center not on level playing fields but on whether consumers need protection at all. "The proposed CFPA appears to be premised on the idea that Washington is better at making financial decisions for all Americans than leaving that choice up to individual Americans," said Spencer Bachus, the ranking Republican on the House Financial Services Committee whose top five 2008 campaign donors were UBS, Citigroup, Credit Suisse, JPMorgan Chase and Bank of America, according to the Center for Responsive Politics.
It's an odd statement, given that all consumer financial regulation is based on the premise that individuals need help from government in dealing with banks and other lenders. From the 1930s through the '60s, banks were straitjacketed by D.C.-dictated interest-rate and lending rules meant to keep them and their customers out of trouble. Decades of haphazard and at times heedless deregulation followed, with eventually disastrous results. The CFPA legislation envisions a partial return of the straitjacket. Among its other tasks, the new agency would devise plain-vanilla products that lenders must offer customers but those customers could still opt for complexity. Most of us need protection, the new reasoning goes. But not quite all.