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Half a (Rotten) Loaf is Worse Than None at All: The Fate of the CFPA

posted by Adam Levitin

As political wrangling over financial services reform continues, the creation of an independent CFPA remains a major bone of contention.  A number of compromise proposals have been bruited:  creating an independent bureau in Treasury, vesting the power in the Fed, vesting the power in the FDIC, or vesting the power in the FTC.  Some proponents for stronger consumer protection in financial view a compromise as acceptable on the theory that half a loaf is a better than none at all. 

It's not.  Better not to have a consumer protection agency at all than to have one placed in a prudential regulator.

There are two key structural problems with consumer protection in financial services.  First is that it is splintered among multiple agencies.  And the second is that it is often combined with prudential safety-and-soundness regulation.  There seems to be some consensus that consumer protection in financial services needs to be centralized.  But merely centralizing it doesn't fix things unless it is centralized in an independent, motivated agency that does not have to dilute its judgments to please bank regulators whose concern is the well-being of banks, not the well-being of consumers.  If consumer protection is not separated from prudential regulation, it will be watered down at best and token efforts that forestall real reform at worst. 

This is not just a matter of a potential repeat of a Greenspan Fed or a Snow Treasury, which are worrisome scenarios for consumer protection, as Paul Krugman has observed.  It is also a matter of the Geithner Treasury or a Bernanke Fed.  Neither Treasury nor the Fed is currently a particularly strong champion of consumer protection.  If consumer protection is housed in Treasury or the Fed, it will get bullied by the prudential regulators.  Proposed regulations will get diluted to the point of being meaningless and then trumpeted as great reforms.

This isn't speculative.  We actually know what consumer protection would look like if it were housed in the Fed or Treasury.  Just compare the Fed/OTS/NCUA credit card regs and the Fed’s overdraft rule with the Credit CARD Act and Dodd’s proposed overdraft regulation.  The regs that came out of the agencies are thin gruel compared to the legislation (which was way too weak on credit cards anyhow). 

Really, is any Treasury Secretary or Fed Chairman going to side with consumer protection over banks' interests over any non-trivial matter?  Financial regulation politics are not generally Democrat vs. Republican, but Wall St. vs. Main Street.  The Treasury and the Fed and the FDIC will always be bastions of Wall Street.  That's where the personnel pool of leadership is drawn, and that's the street where the door revolves.  This is a cultural milieu that believes consumer protection stops with some ineffective disclosures and maybe, just maybe, prohibiting the most egregious practices.  We already do that sort of second-rate consumer protection.  (See the financial crisis.)  We don't need a regulatory deck-chair shuffling to produce that sort of result. 

Consumer protection needs its own home, separate from prudential regulators.  For all the noise made about conflicts between prudential regulation and consumer protection, I have yet to see a single example adduced where there would be a real problem. 

I do not believe that a truly independent office can be created in an existing prudential regulator or the Treasury.  And if it is truly independent, why bother putting it under the aegis of that regulator?  If the concern is about creating a brand new agency, then expand the powers of the FTC.  But it will be a real defeat for consumer protection is a new office is opened in Treasury or the Fed or FDIC.  It will be an adventure in consumer protection in name only, and will make things that much harder as consumer advocates will find themselves having to argue against a federal government bureau of consumer protection. 

[I've gotten questions about what's wrong with FDIC.  FDIC's record on consumer protection has been inconsistent.   Remember that the FDIC board includes the Comptroller and the Director of Thrift Supervision.  One more vote and there's a majority on the board.] 


I agree with the conclusion of thsi post but for different reasons. I am glad to see the CFPA fall by the wayside. There is nothing a CFPA would have accomplished for ordinary citizens that a national usury law would not accomplish with less bureaucracy and more accountability. There are more than two structural problems with consumer finance regulation. One not mentioned is that all disclosure-based approaches have utterly failed to protect consumers from excessive debt.A more radical solution is needed. It is better to directly regulate price and indirectly availability of credit.

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