"Three Myths about the Consumer Financial Product Agency"

Elizabeth Warren responds to some of the worries about creating a Consumer Financial Product Agency:

Three Myths about the Consumer Financial Product Agency, by Elizabeth Warren: I’ve written a lot about the creation of a new Consumer Protection Financial Agency (CFPA)... Today, though, I’d like to post specifically about some of the push back that has developed on this issue.  In particular, I’d like to focus on three big myths – myths designed to protect the same status quo that triggered the economic crisis.

MYTH #1:  CFPA Will Limit Consumer Choice and Hinder Innovation

At a recent hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify one consumer who chose double-cycle billing to be included within the terms and conditions of his or her credit card contract.  It was a great moment.  If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages.  ...

The truth, of course, is that no consumer “chooses” to accept the tricks and traps buried within the legalese of financial products.  ... The CFPA will not limit consumer choice.  Instead, it will focus on putting consumers in a position to make choices for themselves by ... making financial products easier to understand and compare. ...  Once consumers can understand the risk and costs of various products – and can compare those products quickly and cheaply – the market will innovate around their preferences.

Daniel Carpenter ,,, at Harvard University ... has written a great deal about the modern pharmaceutical industry.  While anyone with a bathtub and some chemicals could be a drug manufacturer a century ago,... drug companies were willing to invest far more in research and development ... once FDA regulations drove out bad drugs and useless drugs.  Good regulations support product innovation.

MYTH #2:  The CFPA Will Add Another Layer of Regulation and Increase Regulatory Burden

Current regulations in the consumer financial area are layered on like pancakes...  Today, seven different federal agencies have some form of regulations dealing with consumer credit.  The result is a complicated, fragmented, expensive, and ineffective system.  With consolidated and coherent authority, the CFPA can harmonize and streamline the regulatory system—while making it more effective.

But the real regulatory break-through for the CFPA would be the promotion of “plain vanilla” contracts that would likely meet the needs of about 95% of consumers.  These contracts would have a regulatory safe harbor.  By using an off-the-shelf template for a plain vanilla contracts..., a financial institution can legally satisfy all its federal regulatory requirements—no need to do more. ...

A streamlined new regulatory regime would have a serious impact on the credit industry.  Today’s complicated disclosure system favors big lenders that can hire a legion of lawyers to navigate the rules—and spread the costs among millions of customers.  Those complex rules fall much harder on a smaller institution that must navigate the same regulatory twists and turns, but with far smaller administrative staffs.  Plain vanilla contracts will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward regulatory compliance and more toward customer service and innovation.

MYTH #3:  Prudential and Consumer Regulation Cannot Be Separated

Make no mistake: This is a fancy claim for the status quo.  If the CFPA can be left with the current bank regulators, then it can be smothered in the crib.  For decades, the Federal Reserve and the bank regulators (the OCC and the OTS) have had the legal authority to protect consumers.  They have brought us to this crisis by consistently refusing to exercise that authority.

The agencies’ well-documented failures ... are largely the result of two structural flaws.  The first is that financial institutions can now choose their own regulators.  By changing from a bank charter to a thrift charter, for example, a financial institution can change from one regulator to another.  The regulators’ budget comes in large part from the institutions they regulate.  If a big financial institution leaves one regulator, the agency will face a budget shortfall and the agency will likely shrink.  Knowing this, financial institutions can shop around for the regulator that provides the most lax oversight, and regulators can compete by offering to regulate less.  Regulatory arbitrage triggered a race to the bottom among prudential regulators and blocked any hope of real consumer protection.

The second structural reason that prudential regulators failed to exercise their authority to protect consumers is a cultural one: consumer protection staff at existing agencies find themselves at the bottom of the pecking order because these agencies are designed to focus on other matters. ...  Consumer protection issues are—at best—an afterthought.  The CFPA would create a home in Washington for people who wake up each morning thinking about whether American families are playing on a level field when they buy financial products.  ...

In 2001, Canada created an independent agency much like the proposed CFPA.  I recently spoke with some Canadian economists, and they not only said the system works, they also expressed bewilderment about the idea that prudential and consumer regulation would be combined.  ...

At the end of the day, industry lobbyists try hard to invent myths and make things sound confusing to intimidate the public and to keep policymakers from acting.  ...  The CFPA would put someone in Washington—someone with real power—who cares about customers.  That’s good for families, good for market competition, and good for our economy.