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Financial Consumer Protection--The Last Thing We Need Is Federal Banking Regulator Oversight

posted by Bob Lawless

Yesterday, I was talking with former Credit Slips guest blogger Pat McCoy about perhaps reprising that role for us. McCoy is a law professor at the University of Connecticut and, along with her co-author Kathleen Engel, was writing about Wall Street's role in financing predatory home loans before anyone else wanted to talk about it. Unfortunately, some upcoming professional travel is going to prevent Pat from joining us until later in the spring.

We started talking about the Dodd financial regulation bill announced yesterday. While we were talking, Pat was explaining to me that the proposed Bureau of Consumer Financial Protection would not be as independent as advertised. It was a point that I had not fully appreciated--it is a 1,300 page bill, after all. Even as she prepared to travel, Pat kindly agreed to write up a few a paragraphs on her thoughts about the issue so I could post them here:

by Patricia McCoy
For those who hoped for an independent Consumer Financial Protection Agency, today’s draft Senate legislation dashed those hopes. The bill cuts the CFPA down to size by burying it within the Federal Reserve Board. While the statement accompanying the bill vowed to safeguard the agency through an independent, presidentially appointed director, rulemaking authority, and a dedicated budget, the bill contains another, obscure measure that would fatally hamstring the new “Bureau of Consumer Financial Protection.”

Part of the CFPA’s original rationale was to ensure real consumer protection by transferring that job from federal banking regulators – who botched it miserably -- to a fully independent agency. This would have the added advantage of safeguarding bank safety and soundness by curbing banking regulators’ tendency to loosen regulation at the top of the business cycle. Today’s bill, however, would gut both objectives by giving any federal banking regulator the unprecedented right to appeal consumer protection rules issued by the BCFP to a new Financial Stability Oversight Council, made up in part of – guess who? -- federal banking regulators. The Council could overturn any BCFP rule by a 2/3 vote, upon finding that the safety and soundness of the U.S. banking system or the stability of the financial sector would thereby be placed at risk. Although this roadblock cleverly appears to give the BCFP across-the-board rulemaking power, it undermines that power by allowing banks to lobby the weakest regulator to overturn strong rules. In effect, the bill hands a nuclear option to the same federal banking regulators who failed to protect consumers and the financial system during the housing bubble.

Consider the Federal Trade Commission’s sorry experience in this regard. The Magnuson-Moss procedures make it so cumbersome for the FTC to issue consumer protection rules that the FTC has largely avoided defining “unfair and deceptive acts and practices” by regulation. Today’s proposed appeal mechanism would have the same effect, and for naught. As it is, today’s bill would require the BCFP to consult with federal banking regulators before proposing a rule and to respond to their objections in writing. In other countries that have an independent consumer financial protection agency, such consultation has successfully resolved any safety and soundness concerns. For example, Gabriel Davel, the CEO of the National Credit Regulator in South Africa, writes that his agency has been able to work out safety and soundness issues with banking regulators informally, with no need for a formal right of appeal. Certainly a BCFP, housed within the Federal Reserve, could do the same. Instead, the real effect of the appeal provision would be to chill effective consumer protection rules at inception. But if the credit crisis proved anything, it is that the safety of our financial system demands strong consumer protection. Now is not the time to hog-tie the BCFP with procedural red tape.


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