The Consumer Financial Protection Agency: Key to Safe, Sound and Equitable Access to Credit

Placing enforcement of most consumer financial services requirements – non-depository institutions included (brokers, independent mortgage bankers) -- under one roof is essential. As is making such an agency truly independent, with appropriate staff and adequate financial resources.However, as Barney Frank (D-Mass.), Chair of the House Financial Services Committee, notes, the industry’s “highest priority is killing the agency.” The CFPA would be “dedicated to protecting consumers in the financial products and services markets.” The subprime crisis, predatory lending, astronomic credit card debt and fees all speak to the urgent need to create knowledgeable consumers.

Clearer, simpler products and disclosure forms are a must. And states and localities that choose to take stronger actions, often to respond to localized problems, must be permitted to do so.

Since the federal Fair Housing Act was passed in 1968, a fair lending and community reinvestment infrastructure has emerged. Groups like the National Community Reinvestment Coalition, the Center for Community Change, the National Fair Housing Alliance and ACORN have developed a wide range of skills (including organizing, litigation and social science research) to take advantage of federal laws like the Home Mortgage Disclosure Act and Community Reinvestment Act in order to increase access to credit in traditionally underserved neighborhoods. The CRA generated more than $6 billion in loans to such neighborhoods in the first 20 years after passage of the 1977 law.

Safety and soundness of financial institutions of course is essential. But as Harvard Law Professor Elizabeth Warren (and now Chair of the Congressional Oversight Panel that oversees the Troubled Asset Relief Program – TARP) observed, the current regulatory system has delivered neither safety, nor soundness, nor consumer protection.

Two factors compromise consumer protection under the current regime. First, the financial regulatory agencies that currently have authority to enforce fair lending and related consumer credit laws have other primary motivations. The Federal Reserve is primarily concerned with monetary policy, while the Office of the Comptroller of the Currency, Office of Thrift Supervision and other regulators focus on capital adequacy. Consumer protection is, at best, a secondary consideration.

A second problem is regulatory arbitrage. Regulatory agencies are funded by the fees paid by the institutions they oversee. If lenders perceive their regulator is too aggressive, they can and do change their charter and seek out a more “sympathetic” regulator. Such “shopping” leads to a race to the regulatory bottom. And so Congress would have to provide the necessary level of financial support in order to keep the new agency truly independent and strong.

The eradication of racial discrimination in housing, housing finances and other consumer credit markets must be part of the new agency’s mandate, requiring close collaboration with HUD, the Justice Department and other civil rights agencies. And beyond countering discrimination, the CFPA must embrace and enforce the obligations, under the Fair Housing Act, to affirmatively further fair housing on the part of recipients of Community Development Block Grants and other federal funds (including TARP and other bailout funds, stimulus dollars, those who benefit from the Federal Reserve’s discount window, and financial services providers who receive any other form of federal financial assistance) – as illustrated by the recent pathbreaking successful lawsuit against Westchester County, New York.

What Congress will do regarding creation of a Consumer Financial Protection Agency – especially in light of the industry’s avid opposition – remains to be seen. But for those of us who side with consumers – 99+% of all Americans – the need is urgent, the recipe clear.