Friday, March 5, 2010

Consumer Financial Protection Agency

The proposed new independent Consumer Financial Protection Agency is facing a difficult time in the United States Senate. The hope for an independent, stand alone oversight consumer protection agency seems to be fighting a losing battle. Senate Banking Committee chair, Christopher Dodd, himself formerly embroiled in compromising relationships with bad-acting mortgage crisis players, seems to be considering two proposals for the new agency: either (1) housing a new agency in the Federal Reserve or (2) situating the agency within the Treasury Department. By compromising an independent agency by making it beholden to Fed or Treasury officials is, arguably better than nothing, stripping a new oversight agency of independence will certainly emasculate it from providing clear consumer protection in an unfettered way.

Specifically, there is little reason to believe that a new Consumer Protection Agency under the supervision of the Treasury or Fed will regulate banks and their businesses in any serious, reform oriented way. The current Treasury Secretary Timothy Geithner has already proven to be under-enthusiastic about any serious financial reform as he has cautioned against clamping down on executive pay and has resisted the Volcker’s rule proposed regulation against proprietary trading. Further, with Washington’s current trend of appointing Wall Street insiders as Treasury Secretary the implication is clear that that any Consumer Protection Agency will be hamstrung from its origination.

This following example of credit card contracts provides evidence that a Consumer Financial Protection Agency is needed. In 1980, the average credit card contract was 1 page long. Today, it is often more than 30 pages long. Now with 30 page contracts, complicated ARMs and other sub-prime mortgages, banks should be required to make profits on honest lending practices, not complicated agreements that make profits available to them based on unforeseen fees or penalties.

Will Congress have the will to create an independent Consumer Financial Protection Agency?


  1. Congress is being overly ambitious this year, attempting to tackle too many major issues and not fully devoting its time and attention to what it can accomplish. Though consumer protection issues are always relevant, Congress must pick and choose where to apply their resources. This open dialogue is welcome - Congress just needs to act on it.

    House Financial Services Committee Chairman Barney Frank (D-MA) made the following statement about the need for increased consumer protection in the financial industry:

    "I welcome Elizabeth Warren's forceful Op-Ed in today's Wall Street Journal making a strong case for increased consumer protection in the financial industry. No one familiar with the track record of the bank regulatory agencies with respect to protecting consumers can deny the need for an independent agency if we are going to have effective consumer protection. Bank regulators have traditionally treated their responsibilities for consumer protection as a second priority.

  2. This is an interesting article considering I was able to attend some of the congressional hearings about this proposed agency last summer during my internship. I, along with many critics, believe we already have the regulatory agencies to oversee the financial industry. Some of these agencies include the SEC or even the FTC. There were arguments that the government should avoid the start-up cost of another independent agency and just provide more federal dollars to better equip the existing agencies.

    Many agencies already have the expertise and knowledge to oversee the financial industry. However, an argument can be made that because of tight budgets, they aren't able to exert the time and effort into beefing up protection for consumer's against these financial institutions. In any event, I would like to see how Congress ultimately decides this issue.