Financial Protection Battle

In Congress today debate resumes over a bill that would establish the CFPA, Consumer Protection Financial Agency. The arena is the House Financial Services Committee chaired by Congressman Barney Frank (D – Massachusetts) the legislation’s principal author. On the other side is the financial industry and the US Chamber of Commerce. The CFPA is  the centerpiece of the Obama Administration’s attempt at meaningful financial reform. The effort has become a hard slog.

In a July speech at the National Press Club, Chairman Frank blamed the financial crisis on “Both people who did not believe in regulating, and a regulatory structure that facilitated their ability not to regulate.”

Pumped up by bail outs that have run trillions of dollars, the financial sector is now doing better. It is repaying the taxpayer rescue by lobbying hard to weaken any additional regulation. Because financial meltdown was averted, public demand for reform has ebbed.

The Consumer Financial Protection Agency was conceived to regulate mortgages, personal loans, installment loans, credit cards, debt collection, credit reporting agencies and financial advisory services. Its goal is to put consumers in a position to make better choices for themselves through clearer disclosures that make financial products easier to understand and compare. The CFPA would also consolidate enforcement authority.

The Chamber of Commerce has responded with a multi-million dollar attack ad campaign claiming that the new agency could be so restrictive that even neighborhood butchers wouldn’t be able to extend credit to hungry customers.  Fact check: the bill, HR3126, applies only to financial institutions.

In an effort to woo moderate support, Chairman Frank has stripped the CFPA bill of several provisions:

  • Mortgage brokers no longer have to offer “plain vanilla” 30-year fixed home loans alongside exotic choices like option adjustable rate mortgages.
  • Lenders will not have to adhere to strict standards so that customers both have to understand and be able to afford their loans.
  • The oversight panel will now be comprised of the same bank regulators who favored the banks over consumers during the housing bubble.

There’s a move to create loopholes for derivatives, the risky financial products that contributed to the financial crisis. Congresswoman Melissa Bean, (D- Illinois) is planning to introduce an amendment that would stop states from offering stronger consumer protection.

To raise support for the agency President Barack Obama appeared at a televised event last Friday
presenting five people “who signed contracts they didn’t always understand offered by lenders who didn’t always tell the truth. They were lured in by promises of low payments and never made aware of the fine print and hidden fees.”

Opponents of the CFPA contend that the new agency would increase costs by adding red tape
and exposing lenders to increased liability. They assert that the new regulations would smother innovation. According to Congressman Jeb Hensarling, (R-Texas) “Had the CFPA existed 25 years ago, we would probably have no ATMs, frequent-flyer miles or debit cards.”

Friday the President responded, “They’re doing what they always do—descending on Congress and using every bit of influence they have to maintain a status quo that has maximized their profits at the expense of American consumers… That’s why we need a Consumer Financial Protection Agency that will stand up not for big banks and financial firms, but for hardworking Americans.”

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