Why the U.S. Needs a New Consumer Financial Protection Agency

Amidst the flurry of news surrounding Obama’s Nobel Prize win on Friday, the President made a significant yet under-reported speech on his plans to create a new centralized Consumer Financial Protection Agency. This proposal – one of a number of regulatory reforms currently moving through Congress – would consolidate the overcomplicated and ineffectual regulatory system currently in place. As the President pointed out:

“[There is] no single agency whose sole job it is to stand up for…the American consumer and for responsible banks and financial institutions.”

However, the proposal is meeting with harsh opposition from the powerful banking lobby (shocking!), and substantial changes are being made in the House Financial Services Committee which considerably water down the bill. Obama addressed this issue on Friday, calling out the lobbyists and attempting to remind the American people how important it is that we take decisive action to reform our financial system.

So, in case you’ve forgotten the events of the past year, (or you’ve never used a credit card, or you use gold coins as your primary currency), here are a few key reasons why we need this new regulatory body:

1. Remember the housing bubble? It ‘popped’ and plunged the entire globe into an economic downward spiral. Bankers have done their best to place blame on mortgage brokers and over-zealous home-buyers. However, according to New York Times business columnist Joe Nocera: “Bankers were every bit as complicit in pushing mortgages on customers who lacked the means to pay them back.” After all, they were the ones creating and packaging the subprime mortgages in the first place.

2. Overdraft fees have increased by 35 percent in the past two years alone, according to the Center for Responsible Lending. Last year, banks collected a total of $24 billion from as many as 51 million Americans.

3. The current regulatory system incentives ripping off consumers in order to balance the books. The primary mission of regulatory bodies today is to ensure the safety and soundness of the banking system. Nocera points out:

“When a bank decides to raise a customer’s credit card interest rate to 35 percent to make up for losses elsewhere in the credit card portfolio, that believe it or not, is a good thing from the perspective of safety and soundness. Even though it is a terrible thing for consumers.”

Posted by Mary Tharin

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7 Comments

Filed under Economy

7 responses to “Why the U.S. Needs a New Consumer Financial Protection Agency

  1. Sophie Shulman

    Interesting post! I definitely agree that we need a regulatory agency to address a lot of these problems. Although it does look like some major banks might already be addressing the overdraft problem: http://www.nytimes.com/2009/09/23/your-money/credit-and-debit-cards/23credit.html

  2. Pingback: At least he’s honest

  3. glenn

    How many regulatory agencies are enough?

    Could it be our government is the primary villain in the mortgage “bubble” pop?, “encouraging” banks to make bad loans in neighborhoods they would avoid like the plague if allowed to perform their own statistically sound underwriting?

    Perhaps we really need an agency to ensure government stays out of the business of business.

    • I would be interested to see evidence of the Bush administration encouraging banks to make bad loans.

      • glenn

        I’m not sure you can blame Bush, although I’m not ready to let him off the hook either. The CRA was written in ’76. Wika says the CRA… “is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.”

        An organization’s performance in this regard can determine something as basic whether they can open a branch in a given location.

        The law of unintended consequences strikes again. I think we should repeal any law other than basic discrimination based on race, religion, etc., that interferes with sound underwriting. Then let the institutions make underwriting decision based on the economic merits of the loan applicant rather than the “community” in which the applicant is purchasing property.

  4. Michael Stone

    The Center for Responsible lending is the advocacy arm of a large web of credit unions under the umbrella of Center for Community Self-Help. Self Help’s borrowers have a default rate 7 times higher than other credit unions. They are fighting tooth&nail to put the spotlight on ATMs, payday loans and personal banking in general to keep the heat off their affiliates.

  5. Consider the presumptuousness in the banking lobby involving itself and insisting that its interests be served in Congress as it fashions financial regulatory reform. That they are in any position to be part of that process is beyond at least John Galbraith. If you are interested, here is my post: http://euandus3.wordpress.com/2009/10/31/the-banking-lobby-on-the-presumptuousness-of-pushiness/

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