In June 2009, President Obama proposed the creation of a Consumer Watchdog Agency called the Consumer Financial Protection Agency. Above, watch Professor Elizabeth Warren explain this idea.
What is the Consumer Financial Protection Agency (CFPA)?
The CFPA would be a single federal agency whose mission would be to protect consumers from dangerous financial products and practices. This would include credit cards, mortgages, debit cards, all consumer loans, payment systems, bank accounts, and more. (It would not cover insurance or investments.)
Why do we need a CFPA?
For years, consumers have dealt with toxic mortgages, outrageous interest rates, and unreasonable bank fees, all in a largely unregulated market. Federal agencies are responsible for regulating all other consumer products, from toys to toasters to aspirin; it's time that there was an agency completely dedicated to protecting consumers from dangerous financial products.
"We don't say 'buyer beware' when people are buying prescription drugs, or when they're concerned about lead paint in toys, but when Americans purchase financial products... they often have little idea what those products... contain and whether or not they're good for their families."
- Senator Dick Durbin
Currently, the responsibility to protect consumers in the financial marketplace is spread among ten different regulating agencies, none of whom have consumer protection as their main goal. It is abundantly clear that the existing regulators have failed to protect consumers. For proof, look at some of the stories shared on our website.
"Consumer financial products were the front end of the destabilization of the American economic system."
-Professor Elizabeth Warren
Some people have asked why we can't deal with this problem simply by making the present regulatory structure work better. They suggest that this could be done in several ways: by pressuring or shaming the current regulators into doing better (which they are all promising to do), by appointing new regulators who are more committed to consumer protection (which is also happening, as openings arise), and by enacting new laws responding to particular problems (as was recently done for credit cards and is pending in many other areas).
The answer is that there are deep flaws in the basic structure of the current regulatory system that will lead these limited changes, while positive, to fall far short of providing the consumers with the protections that they need and deserve. Even when Congress passes new laws, it is up to the regulators to write the rules that will implement them, and then to enforce the newly written rules.
The basic flaws in the current regulatory structure are these:
Consumer protection responsibilities are divided among ten federal agencies, and between federal and state regulators, in a haphazard and confusing way. No one is really in charge, and some types of lenders, such as payday lenders and mortgage companies not related to banks, have no federal regulator at all.
None of these agencies have consumer protection as their primary mission, and so the interests of consumers are inevitably subordinated to things that the agencies care about more. In the case of the four federal bank regulators, for example, concerns for banks' profitability ("safety and soundness") have resulted in a reluctance to crack down on practices that promote bank profits at the expense of exploited consumers.
Companies can, in effect, choose which agency - if any - will regulate them, by choosing what kind of bank "charter" they will operate under. This leads to great pressures on bank regulators to loosen their regulations. Any regulator who decides to be too tough on its banks will find itself without many banks to regulate, and without the fees the reguated banks pay. The result is a "race to the bottom" in terms of consumer protection standards.
So why do we need a CFPA? Because unless we have a single agency that has consumer protection as its sole mission and that has the authority to write and enforce rules for the whole range of consumer financial products, the basic flaws in the current regulatory system will remain - and effective consumer protection will not be achieved.
How would the CFPA help consumers?
Several features of the proposed CFPA would enable it to be more effective in providing real consumer protection:
- Consumer protection would be the CFPA's only mission, so consumer interests would not be subordinated to other concerns.
- The CFPA would regulate all companies that are involved in consumer lending, so that companies would not be able to seek out a regulator with looser standards or to avoid regulation entirely.
- The CFPA would impose the same rules on all companies offering the same products, regardless of their charter or corporate form, so all consumers getting the same type of loan would receive the same protections.
- The CFPA would have the authority to both write and enforce rules, thus eliminating the disconnect that can lead to gaps in the current system.
- As the single agency charged with consumer financial protection, the CFPA would have the motivation and the resources to be able to collect the data, carry out the research, and develop the expertise that are needed to regulate effectively.
- With its data, expertise, and unified authority, the CFPA would be able to respond to new abusive practices and products promptly and effectively.
What would the CFPA do?
The Consumer Financial Protection Agency would:
- Ensure that credit and payment products do not have predatory or deceptive features
- Ban products which don't meet certain safety requirements
- Stay on top of market innovation to make sure new products meet safety requirements
- Conduct research and investigations into credit industry products and services
- Provide consumers with high quality information about how to avoid abusive lending and credit problems
Because the CFPA would regulate the entire range of products and practices in consumer lending, it would be able to address current problems in several key areas. (The legislation that seeks to establish the CFPA does not address the substance of those areas, but instead establishes the CFPA as the single agency with the authority necessary to establish and enforce rules.)
The types of loan products where widespread abuses are now taking place include:
- Credit cards (the CFPA would take over implementing and enforcing the recent law and regulations, and would update them when appropriate)
- Mortgage lending
- Overdraft loans
- Auto loans
- Private student loans
- Payday loans, auto-title loans, and refund anticipation loans
Important
loan practices that the CFPA would have the power to address include:
- Forced arbitration clauses in credit card terms and other contracts
- Debt collection practices, which are too often abusive
- Mortgage loan servicing
- Enforcement of the fair lending laws that prohibit discrimination on the basis of race, ethnicity, age, sex, and other factors
In addition, and very importantly, the CFPA would end federal preemption of state consumer protection laws. The standards established by the CFPA would be a floor, rather than a ceiling, for consumer protections - individual states would be able to enact stronger protections for their own citizens as the need arises. And state attorney generals would regain the power to enforce their state's laws against lenders who violate them, a power that has often been denied in recent years.
More Information
Elizabeth Warren
Elizabeth Warren, a professor at the Harvard Law School, first popularized the idea of creating an agency devoted to protecting consumers from abusive financial products, and she remains the idea's most prominent and most eloquent proponent. She recently summarized this case for the Obama administration's proposal in this three-page document and in this compelling seven-minute video. She first presented her argument in an article in Democracy magazine in 2007. Academics and policy wonks may also want to look at the 104-page law review article that she co-authored last year.
The Treasury
The U.S. Treasury Department prepared a packet of information (pdf) for Senators and Representatives to review during their August break in the summer of 2009. It presents a great deal of information clearly, simply, and effectively. (Note: only the first nine pages of the document relate to the CFPA.)
Adam Levitin
Adam Levitin, a law professor at Georgetown University, prepared an excellent "Briefing Paper" on the CFPA. One consumer advocate has dubbed this work "the best one-stop paper I've seen for understanding why the CFPA needs to pass."
Bob Herbert
Many supporters of the CFPA have tried to distill the case into a
single op-ed column. One of our favorites is by New York Times
columnist Bob Herbert: "Chutzpah on Steroids."
Congressional Testimonies
Several long-time consumer advocates testified before Congress in recent months, and their written testimony provides a wealth of information and arguments. We particularly recommend testimony by, in alphabetical order:
Last update: October 2009.
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