More on the Proposal for the Consumer Financial Protection Agency

by Jeff Sovern

The White House proposal can be found here.  Ed Mierzwinski has collected many valuable links on the proposal over at the U.S. PIRG Consumer Blog.

A couple of random comments: the only statute referred to by name in the brief CFPA White House proposal is the Community Reinvestment Act, which some, of course, have blamed for the subprime crisis--in my view, unfairly. The proposal states that the new agency will "strongly enforce" the CRA. 

The proposal contains a lot of language about disclosures and requiring lenders to offer "plain vanilla" loans. That sounds like something out of Cass Sunstein and Richard Thaler's Nudge: let consumers have choice but change the "choice architecture" to help them make decisions.  But the proposal also would give the agency the power to ban unfair terms, so that goes further.  In the context of mortgage lending, the proposal calls for giving the agency the power to ban yield-spread-premiums and prepayment penalties, provisions that many consumers seem to lack the savvy to protect themselves from.  So I wonder if the goal is to preserve consumer choice in areas where consumers are likely to be competent to make decisions, perhaps with a nudge, but bar terms that consumers are less well equipped to deal with.  That would be great.

The proposal also calls for giving the agency the power to impose "heightened duties of care on financial intermediaries that reflect reasonable consumer expectations." I wonder if that means a fiduciary duty or suitability standard, as some have urged.  The proposal gives mortgage lending as an example, and states the agency would have authority to "[r]equire mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, as well as a duty to determine the mortgages they sell are affordable to borrowers."

What I like best about this proposal is that unlike many of the agencies that already have some role to play in consumer lending, this agency's mandate would be to focus on consumer protection.  Its primary role would not be to insure the safety and soundness of financial institutions or to keep the economy running.  I wrote an op-ed in the Pittsburgh Post- Gazette in March of last year calling for an agency to oversee consumer credit transactions that would not be tasked with other asignments as well.  I elaborated on this in a blog post on March 19, 2008 about Alan Greenspan's memoir, The Age of Turbulence, after noting that the book largely ignored the many consumer credit regulations the Fed oversees:

[I]sn't something wrong when the memoir of the person at the head of what is probably the agency with the greatest power over the rules governing consumer credit transactions gives those rules such short shrift?  Not that I blame Greenspan.  He was appointed to the job because of his mastery of macroeconomics.  But again, shouldn't someone who has mastered the law of consumer credit run the principal agency devoted to that subject?  In other words, at the risk of beating a dead horse, is the Fed the best agency to administer consumer credit laws?

Comments

[Michael Smith]

This is really bad news for American Consumers. At first glance this may sound needed, but it was government intervention in the mortgage market (i.e. backing loans) that led to reckless lending.

This agency will strip the reward away from lenders to provide loans. Those with money will choose to invest it in other industries and away from lending. This will lead those who remain in lending ventures to only lend to those who pose a low risk. For the majority of Americans they will see a decrease in the amount of credit they can receive. There will be fewer bankruptcies, fewer credit cards balances, but there will be a slowdown in new business creation and home buying.

We should be very concerned about this further expansion of government.