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The Consumer Financial Protection Agency

The Obama Administration, as part of its proposal for comprehensive financial regulatory reform (much needed), proposes the creation of the Consumer Financial Protection Agency.  The Consumer Financial Protection Act, the legislation that creates this new agency, strips away and consolidates the consumer protection duties and responsibilities of various existing federal regulators into one agency - the Consumer Financial Protection Agency.  “The agency will be dedicated to looking out for American families when they take out loans or use other financial products or services – with a mission to promote access and protect consumers from unscrupulous practices across the market.”

Needless, to say the financial conglomerates hate this idea and their friends in congress are out to kill it:

U.S. Chamber Mounts Opposition to So-Called Consumer Financial Protection Agency
Republicans Plan A ‘Barrage Of Amendments’ To Slow Consumer Protection Bill
Bank Lobbyist’s Freudian Slip: ‘We’re Not For Any Regulation’

It seems that the financial conglomerates hate this proposal for the a new consumer protection agency more than any other aspect of the proposed regulatory reform.  Why?  Because these financial conglomerates and many other ‘financial services’ companies made a lot money off unsuspecting people.  Many of these financial conglomerates owned (and still own today) subprime lenders.  Financial conglomerates, during this financial crisis which they helped create, have relied heavily on bank fees.  It was estimated that they were to make $38 billion from overdraft fees alone.  However, it appears that the financial conglomerates have backed off these onerous overdraft fees.

Here is an excerpt from the Treasury Department’s White Paper on financial regulatory reform:

Prior to the current financial crisis, a number of federal and state regulations were in place to protect consumers against fraud and to promote understanding of financial
products like credit cards and mortgages. But as abusive practices spread, particularly in the market for subprime and nontraditional mortgages, our regulatory framework proved
inadequate in important ways. Multiple agencies have authority over consumer protection in financial products, but for historical reasons, the supervisory framework for
enforcing those regulations had significant gaps and weaknesses. Banking regulators at the state and federal level had a potentially conflicting mission to promote safe and sound
banking practices, while other agencies had a clear mission but limited tools and jurisdiction. Most critically in the run-up to the financial crisis, mortgage companies and
other firms outside of the purview of bank regulation exploited that lack of clear accountability by selling mortgages and other products that were overly complicated and
unsuited to borrowers’ financial situation. Banks and thrifts followed suit, with disastrous results for consumers and the financial system.

This was a diplomatic way of describing what was happening.  In Chicago, from 1993 to 1998, the number of subprime refinance loans reported under Home Mortgage Disclosure Act (HMDA) increased ten-fold from 80,000 subprime refinance loans in 1993 to 790,000 in 1998.  In 2000, I was working on the issue of predatory home lending and financial literacy in Chicago and the cases I encountered were very tragic.  Unsuspecting senior citizens, cash poor but equity rich, basically signing their home over to predatory mortgage brokers.  I saw one city block devastated by one mortgage broker going door to door and preying upon unsuspecting homeowners with deceptive marketing and incomplete loan disclosures and fraud.  I had an senior elderly woman in my office break down and plead for help because she was suckered into signing blank loan documents that were later filled in by the mortgage broker.

This is how an ex-employee of one predatory lender described his “perfect customer”:

It would be an uneducated widow who is on fixed income - hopefully from her deceased husband’s pension and social security - who has her house paid off, is living off of credit cards, but having a difficult time making payments, and who must make a car payment in addition to her credit card payments.

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Our pleas to elected officials and state regulators fell on deaf ears because the Illinois Mortgage Bankers Association owned them.

But my stories are far from unique.  In the 1990s, the San Francisco District Attorneys’ Office was being inundated with consumer complaints regarding Providian Financial one of the top credit card issuers at the time.  The biggest complaint and most common complaint was that Providian was receiving payments from its customers but failing to deposit them for as long as a two week period so that they would be processed after the customers’ due dates and the customers would be assessed a late payment fee and the customers’ interest rates would be boosted to a more usurious rate - a very profitable practice for Providian. 

Despite supposedly being regulated by the Office of the Comptroller of the Currency (OCC), the San Francisco District Attorney’s Office was forced to prosecute Providian.  The OCC, realizing the error of its ways and egregious practices of Providian, later joined the S.F. District Attorney’s Office.  Providian later settled the case for $300 million.  The OCC tried to take credit for leading the way in the investigation and settlement but the fact was, if it was not FOR the S.F. District Attorney’s Office, Providian would have continued the predatory practices. 

For more on the Providian - S.F. District Attorney’s Office check out this Frontline episode: Secret History of the Credit Card

During that last decade, a very common and disturbing situation was when state’s would want to enforce its own consumer protection laws against a financial conglomerate but the federal regulator would step in and run interference for the financial conglomerate and block any enforcement actions by the states.  For instance, here is on op-ed from Eliot Spitzer, former Governor and New York Attorney General:

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers’ ability to repay, making loans with deceptive “teaser” rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets….

Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.

Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

One of the more powerful provisions in the proposed Consumer Financial Protection Act will allow states to pursue legal actions against financial conglomerates and other ‘financial services’ companies for violations of the Consumer Financial Protection Act (See Sec. 1042 - PRESERVATION OF ENFORCEMENT POWERS OF STATES.)   The federal government will not preempt the states when it comes to enforcing state consumer protection laws against financial conglomerates and other ‘financial services’ companies.  This is pretty powerful stuff.

So what does the Consumer Financial Protection Act mean for consumers?  According to the Administration:

• Protection Against Unfair Credit Card Rate Increases, Late Fee Traps: The agency will enforce the credit card bill enacted by Congress and President Obama this spring, taking responsibility for enforcing the ban on unfair rate increases and for the implementation of new rules preventing late fee traps.
• Guidelines for Simple “Plain Vanilla” Products: The agency could create guidelines for standard mortgages without prepayment penalties; that are fully underwritten with documented income; that collect escrow for taxes and insurance; and have predictable payments.
• Duties of Care for Mortgage Brokers: The agency could require mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, and a duty to help ensure that only appropriate loans are offered.
• Ban Unfair Side Payments: The agency could ban unfair practices such as “yield spread premiums” – side payments from lenders that encourage mortgage brokers to push consumers into higher priced loans.

Oh wait, forget about “Plain Vanilla” Products.  Chairman Barney Frank put the kabosh on this important aspect of the Consumer Financial Protection Act.  Mr. Frank was probably viewing this as a compromise but in this very partisan environment and how financial conglomerates own both political parties this “compromise” can be viewed as a sign of weakness.  This is a significant ‘compromise’ for consumers and as Kevin Drum says:

The “plain vanilla” requirement would accomplish something the financial industry hates: it would make it easy for consumers to compare products.  Even if you’re planning to buy something non-vanilla, the price of the vanilla product provides a baseline that makes it easier to compare companies to each other and easier to see exactly how much you’re paying (and what extra terms you’re agreeing to) for the more complex products.  That’s good for consumers.

But this benefit for consumers has been ditched.  There is blood in the water and the sharks are ready to pounce.  The financial conglomerates and the their partners in crime, U.S. Chamber of Commerce, will implement the same astroturf strategy implemented by private health insurance industry to kill health care reform. 

One way to fight for the Consumer Financial Protection Act is to dispel many of the myths that are already being circulated by the financial conglomerates.  Here are just a few (for more myths vs. realities go here):

Myth:  The CFPA would duplicate the work of existing agencies, and increase regulatory burden on businesses.

Reality:  The new Agency would consolidate the consumer protection rule-making and enforcement that is currently scattered across several agencies.  The functions would not be duplicated; rather, they would be stream-lined into a single agency, thereby reducing regulatory burden and expense. 

Myth:  Giving the CFPA supervisory authority over consumer protection matters will create duplication and confusion.  With the “safety and soundness” regulators examining institutions for “prudential” concerns and the CFPA examining for consumer protection concerns, there’d be two separate teams of people examining each institution.  This would create confusion, coordination problems, and waste.

Reality:  No new examiners or examinations would be involved.  The existing regulators already each have two separate teams of examiners for separate examinations on consumer protection and “safety and soundness” risk management.  All that would happen is that the consumer protection examination teams from all the agencies would be consolidated in the CFPA.  This would facilitate consistency, economy, efficiency and coordination.  No new regulatory burden would be added.

Myth:  The CFPA will stifle innovation and limit consumer choice.

Reality:  There will be no limits on innovation.  All that will be limited are abusive practices of the sort that led to the current crisis.  These practices limited consumer choice by crowding out of the market the better loans for which many borrowers qualified but which they were not offered.  The CFPA would ensure that consumers are offered the best loans for which they qualify, and not just the riskiest loans that are most lucrative for brokers.  The CFPA will increase consumer choice by ensuring that responsible products are not crowded out of the market and by making sure that consumers are offered a wider range of options.

Myth:  Separating consumer protection from “safety and soundness” regulation could lead to problems if the CFPA fails to take safety and soundness into account.

Reality:  Agencies throughout government routinely coordinate on overlapping areas of authority.  Consultation is the norm in government, not the exception, and there is no reason to believe the CFPA will be any different.  Indeed, the CFPA bill has added safeguards to ensure this outcome.  Not only does the bill specifically require the CFPA to consult and coordinate with the prudential (“safety and soundness”) regulators, but it reserves for a prudential regulator a seat on the CFPA’s 5-member Board.  It also requires the CFPA to share confidential examination reports with the prudential regulators and vice versa.  The confidential exchange of information will give the CFPA greater insight into any significant safety and soundness concerns expressed by prudential regulators, and will help the banking agencies to understand consumer protection concerns exposed by CFPA examinations.

There are certain action items we can take to support the Consumer Financial Protection Act.  First, we can join or support the Americans for Financial Reform, a coalition of nearly 200 national, state and local organizations ranging from financial experts to community groups, who is fighting for the passage of the Consumer Financial Protection Act. Second, we can write or call our elected officials in Washington and tell them we support the Consumer Financial Protection Act and then contact the House Financial Services Commitee and tell Congressman Frank thank you for his efforts but NO MORE changes to the Consumer Financial Protection Act.

FYI.  Here is the list of House Financial Services Committee Members:

Chairman Barney Frank represents Massachusetts’ Fourth Congressional District. The other Democratic members of the Committee are:

Rep. Paul E. Kanjorski, PA
Rep. Maxine Waters, CA
Rep. Carolyn B. Maloney, NY
Rep. Luis V. Gutierrez, IL
Rep. Nydia M. Velázquez, NY
Rep. Melvin L. Watt, NC
Rep. Gary L. Ackerman, NY
Rep. Brad Sherman, CA
Rep. Gregory W. Meeks, NY
Rep. Dennis Moore, KS
Rep. Michael E. Capuano, MA
Rep. Rubén Hinojosa, TX
Rep. William Lacy Clay, MO
Rep. Carolyn McCarthy, NY
Rep. Joe Baca, CA
Rep. Stephen F. Lynch, MA
Rep. Brad Miller, NC
Rep. David Scott, GA
Rep. Al Green, TX
Rep. Emanuel Cleaver, MO
Rep. Melissa L. Bean, IL
Rep. Gwen Moore, WI
Rep. Paul W. Hodes, NH
Rep. Keith Ellison, MN
Rep. Ron Klein, FL
Rep. Charles Wilson, OH
Rep. Ed Perlmutter, CO
Rep. Joe Donnelly, IN
Rep. Bill Foster, IL
Rep. Andre Carson, IN
Rep. Jackie Speier, CA
Rep. Travis Childers, MS
Rep. Walt Minnick, ID
Rep. John Adler, NJ
Rep. Mary Jo Kilroy, OH
Rep. Steve Driehaus, OH
Rep. Suzanne Kosmas, FL
Rep. Alan Grayson, FL
Rep. Jim Himes, CT
Rep. Gary Peters, MI
Rep. Dan Maffei, NY

Republican Members

Rep. Spencer Bachus, AL
Rep. Michael N. Castle, DE
Rep. Peter King, NY
Rep. Edward R. Royce, CA
Rep. Frank D. Lucas, OK
Rep. Ron Paul, TX
Rep. Donald A. Manzullo, IL
Rep. Walter B. Jones , NC
Rep. Judy Biggert, IL
Rep. Gary G. Miller, CA
Rep. Shelley Moore Capito, WV
Rep. Jeb Hensarling, TX
Rep. Scott Garrett, NJ
Rep. J. Gresham Barrett, SC
Rep. Jim Gerlach, PA
Rep. Randy Neugebauer, TX
Rep. Tom Price, GA
Rep. Patrick T. McHenry, NC
Rep. John Campbell, CA
Rep. Adam Putnam, FL
Rep. Michele Bachmann, MN
Rep. Kenny Marchant, TX
Rep. Thaddeus McCotter, MI
Rep. Kevin McCarthy, CA
Rep. Bill Posey, FL
Rep. Lynn Jenkins, KS
Rep. Christopher Lee, NY
Rep. Erik Paulsen, MN
Rep. Leonard Lance, NJ

This is a battle that we must win.  We have to make banking and financial services boring again.  Good luck.