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

by Gregory D. Squires September/October 2009 issue of Poverty & Race

Of the many factors that have made the United States the world’s premier capital marketplace for 80 years, our robust regime of consumer and investor protections is among the most important. The United States cannot have a world-class financial marketplace unless consumers and investors have full confidence in the safety and soundness of financial institutions, the integrity of the markets, the quality and suitability of financial products, and the basic fairness of the broader financial system.

Robert S. Nichols
President and CEO, The Financial Services Forum

As part of its financial regulatory reform proposal, the Obama Administration has called for creation of a Consumer Financial Protection Agency (CFPA) that would consolidate enforcement of most consumer financial services requirements under one roof. A truly independent agency, with appropriate staff and financial resources, is critical to the realization of the goal of fair access to credit and to assure the safety and soundness of the nation’s financial service providers. According to Barney Frank (D-Mass.), Chair of the House Financial Services Committee, the industry’s “highest priority is killing the agency.” But the success of efforts to restore stability to the nation’s financial markets and continue what has been progress toward the goal of fair access to financial services may depend on the fate of this proposed agency.

What the Consumer Financial Protection Agency Would Do

The CFPA would be “dedicated to protecting consumers in the financial products and services markets.” It would have authority to write regulations, supervise compliance and enforce the law when violations occur. According to the initial Administration proposal, among the statutes that would be covered are the Truth in Lending Act, Home Ownership and Equity Protection Act, Real Estate Settlement and Procedures Act, Community Reinvestment Act (CRA), Equal Credit Opportunity Act, Home Mortgage Disclosure Act (HMDA) and Fair Debt Collection Act. The agency would also have jurisdiction over non-depository institutions (e.g., independent mortgage bankers, brokers) that are not currently supervised by any federal authority. These are the lenders primarily responsible for the problematic subprime and predatory lending of recent years.

One objective of the agency would be to create clearer, simpler products and disclosure forms in order to better educate consumers and bring far more transparency to financial services markets. As part of that effort, the CFPA would establish minimum standards for all lenders to follow, but it would not pre-empt those states or local communities that choose to take stronger actions or respond to localized problems.

If a truly independent consumer protection agency is created, it would build on a number of steps that have been taken in recent decades to make credit available on more equitable terms. That progress has been challenged by the rise in predatory lending, the foreclosure crises that followed—stripping equity and wealth particularly from minority and low-income homeowners, and the ensuing economic crises that now reach well beyond financial institutions. But since the federal Fair Housing Act was passed in 1968, a fair lending and community reinvestment infrastructure has emerged that has changed the way many financial institutions do business. Groups like ACORN, the National Community Reinvestment Coalition, the Center for Community Change, the National Fair Housing Alliance and others have developed a wide range of skills (including organizing, litigation and social science research) to take advantage of federal laws like HMDA and CRA in order to increase access to credit in traditionally underserved neighborhoods. According to the National Community Reinvestment Coalition the CRA generated $4.7 billion in loans to such neighborhoods in the first 20 years after passage of the 1977 law. (Some pundits have argued that the CRA and related fair lending rules were major contributors to the rise in subprime lending and the economic fallout, but research by the Federal Reserve Board and others demonstrated that CRA-covered lenders made a tiny fraction of the problematic loans; that it was unregulated lenders not covered by the Act who made the overwhelming share of these loans; and that CRA-related lending has been profitable to lenders.) The Consumer Financial Protection Agency would provide an additional tool that the growing fair lending and community reinvestment infrastructure could utilize.

Industry Response, and a Reply

While asserting its commitment to consumer protection, the financial services industry, as noted above, has argued against creation of this new agency. A typical response is that offered by the Executive Vice President of the Securities Industry and Financial Markets Association: “We are concerned that creating a new agency for these purposes might lead to wasteful and duplicative regulation while failing to deliver the hoped-for benefits due to the separation of consumer protection and prudential regulation.” And in the words of the president and CEO of the Investment Company Institute: “A separate regulatory regime…could well mean…conflicting regulatory philosophies and potential regulatory overlap.”

Specifically in the area of home finance, the charge is often made that separating safety and soundness regulation from consumer protection could compromise the stability of financial institutions while undermining innovation and limiting choice, all to the detriment of consumers. And it is not just the industry that takes this position. As Federal Reserve Chair Ben S. Bernanke noted, “Consumer protection rules and their enforcement are complementary to prudential supervision.” Comptroller of the Currency John C. Dugan expressly rejected this separation, observing that “the Proposal’s attempt to completely divorce consumer protection from safety and soundness raises real potential problems.” And the ultimate consumer protection, it is argued, is maintaining the solvency of financial institutions that could be threatened by this approach. In fact, legislation (H.R. 3126, the Consumer Financial Protection Agency Act of 2009), subsequently introduced by Barney Frank, retained CRA jurisdiction within the current prudential bank regulatory agencies.

But as Elizabeth Warren (Harvard Law professor and Chair of the Congressional Oversight Panel that oversees the Troubled Asset Relief Program-TARP), who has long called for such an agency, observed, the current regulatory system has delivered neither safety and soundness nor consumer protection. And as several consumer advocates have noted, had the federal financial regulatory agencies, and particularly the Federal Reserve Board, enforced the laws on the books, sub-prime and predatory lending would not have taken off and the foreclosure crisis and related economic problems would not have occurred to anywhere near the same extent. The primary problem remains the absence of a strong, independent consumer advocate.

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, often for the short run. Consumer protection is, at best, a secondary consideration. As Treasury Secretary Timothy F. Geithner said, “…the banking agencies responsible for implementing and enforcing consumer protection have higher priorities. The agencies’ primary focus is the safety and soundness of the institutions they oversee. As a matter of mission and internal organization, they are focused on the effect of a bank’s products and practices on the bank itself, rather than the effect on consumers.” The president of one Midwestern mortgage lender advised me, off the record, that he did not know of any career professional in any regulatory agency who was promoted because of his or her interest in, knowledge of or advocacy for consumer protection, but he knew several who were promoted at least in part because they did not push for strong enforcement of consumer protection laws.

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” clearly serves as a disincentive to enforce consumer protection laws and leads to a race to the regulatory bottom.

An independent agency whose primary task is to enforce such rules would operate differently. There would be no conflict. The culture would encourage rather than discourage strong enforcement. As Treasury Secretary Geithner observed, the transparency that would be provided by the CFPA, coupled with its market-wide jurisdiction, would reduce regulatory shopping, encourage innovation in the creation of better products for more informed consumers, and strengthen safety and soundness while better protecting consumers. The key, again, is independence. While such an agency needs adequate support, in terms of the number and skills of the staff, and of course funding, in order to assure its independence its funding should not come from fees paid by lenders. Congress would have to provide the necessary level of financial support. Otherwise, the agency would eventually become captured by the entities it is supposed to regulate.

There are potential shortcomings in the Administration’s proposal. A primary example is the limited attention to traditional forms of discrimination. As the Leadership Conference on Civil Rights has argued, “the CFPA must explicitly be tasked with protecting the civil rights of consumers.”

Several civil rights groups have argued for maintaining enforcement of the Fair Housing Act against lenders within HUD and the Department of Justice, as opposed to moving these responsibilities to the new agency. While that approach has clear advantages, it will be crucial to stress collaboration between the agencies and ensure that the eradication of discrimination in housing, housing finance and other consumer credit markets is also part of the new agency’s mandate. This objective could be pursued in collaboration with HUD, Justice and other civil rights agencies, perhaps in a Civil Rights/Fair Lending Compliance and Enforcement Office within the agency.

A related issue that HUD is currently examining is the extent to which the obligation to affirmatively further fair housing is carried out by recipients of Community Development Block Grants and other recipients of federal funds, as required by law. [See p. 11 article on Westchester County settlement.] Such a requirement should be established for all recipients of federal funds including lenders receiving TARP and other bailout funds, recipients of stimulus dollars, those who benefit from the Federal Reserve’s discount window, and financial service providers who receive any other form of federal financial assistance. All should be required to use those funds and manage their operations generally to affirmatively further fair housing. Enforcement of this obligation should be explicitly included as one of the responsibilities of CFPA.

Does the Consumer Financial Protection Agency Have a Future?

Whether an effective CFPA is ever created remains to be seen. Already, as noted above, the bill introduced to create the agency would limit the authority provided in the Administration’s initial proposal. No doubt other changes will occur before any agency is up and running, should it come into existence. Some would strengthen the agency, others would weaken it. As is so often the case, the devil is in the details.

A strong, independent consumer agency can help change the way financial service providers do business. But, as Chairman Frank observed, the industry is out to kill the agency—just one more indication why such an agency is necessary.

This is an abbreviated version (completed on September 22, 2009) of a paper that was commissioned by the Kirwan Inst. for the Study of Race and Ethnicity as part of their research and policy initiatives relating to the subprime lending and foreclosure crisis (see box p. 10). A complete version of the original paper, containing citations and references, is available at http://fair recovery.org/whyfairrecovery/special issues.html

Gregory D. Squires is a member of PRRAC's Social Science Advisory Board, as well as a Professor of Sociology and Public Policy and Public Administration at George Washington University. He serves on the Board of the Woodstock Inst. and the National Housing Inst., as well as on the Advisory Board of the John Marshall Law School Fair Housing Legal Support Center. squires@gwu.edu
 
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