Is a New Consumer Protection Agency the Key to Financial Reform?

The House of Representatives has passed a sweeping financial reform bill that includes the establishment of a new, independent, and empowered Consumer Financial Protection Agency. The debate is currently unfolding in the Senate, where Chris Dodd has pledged to push a comprehensive reform package over the finish line before he retires at the end of the year. As policy deliberations unfold, the specifics of this proposal deserve scrutiny—especially with an eye toward the policy features which would be most effective in protecting consumers and creating a safer and sustainable marketplace for financial services.

I’ve just released a paper which is designed to contribute to this process by presenting the case for creating a new agency, describing key features of the House bill, and reviewing some of the primary issues as stake.

From my vantage point, the case for creating a new agency is strong. At its core, it would distinguish and elevate consumer concerns from those focused on the “safety and soundness” of individual firms. Plus, with a mandate to protect consumer and stop abusive financial practices, the new agency could outlaw the peddling of a bunch of deceptive and unfair financial products which have taken hold in recent years. These are now offered without the oversight of any regulator since they are provided in the alternative financial sector. Instead, there should be a set of principles that govern future product regulations, such as transparency, simplicity, fairness, and accountability. I argue that making the transition from a rule-based regulatory regime to a principles-based framework would be a significant paradigm shift in the oversight of the financial marketplace. By better matching consumers with appropriate savings and credit products in a fair and transparent manner, the CFPA may create a new foundation for the financial system by restoring the previously essential characteristics of integrity and trust.

However, it is increasingly looking likely that the Senate may be unable to muster enough support to back the House approach. It is a fluid time in the policy process. A number of alternative ideas are getting considered. In general, I like the approach taken by the House but if the Senate decides against creating a new stand alone agency it will still have to address a series of key policy issues to make real progress. These are reviewed in the paper but the cribbed notes version includes making sure the non-bank providers (payday lenders, subprime mortgage providers, check cashers, etc.) are subject to much greater scrutiny, generating new rule-making and enforcement authorities based on prioritizing consumer protections, re-defining the relationships among bank regulators so consumer issues are not commensurately elevated, and clarifying interaction with state and local authorities to make sure that federal consumer protections are a floor and not a ceiling.It remains a tough political climate for reform, but let’s see if Chris Dodd can get this done.