News Flash: Lenders Prefer Fragmented Regulation of the Consumer Financial Marketplace

Now that the House Financial Services Committee has passed the Consumer Financial Protection Agency, the American Bankers Association has stepped up its efforts to weaken the legislation or defeat it entirely. The Chamber of Commerce has also embarked on a multi-million dollar campaign with an "inside-the-beltway push" and a "grassroots mobilization" nationwide. And Congressional Republicans have joined in, complaining that the "sweeping authority" exercised by the dreaded CFPA will "impede innovation and kill jobs."

It can't surprise anyone that those who lend money to consumers do not care to be regulated by an agency focused solely on consumer protection. Nor does it shock us to learn that political opponents of the current administration want to protect their constituencies. And it is, of course, predictable that existing regulators at the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the FTC and other agencies are not eager to concede authority to a new agency. For that matter it does not come as news that most legitimate consumer advocacy organizations favor a proposal fashioned to elevate the priority that would be given to consumer protection.

But it is rather remarkable that Congress has also heard from a different set of experts about this legislation. More than eighty law professors who teach and write on consumer and banking law issues have urged Congress to create the CFPA. Why have these professors -- who have no economic stake in the outcome of this struggle -- weighed in?

Many of us are saddened by the lending debacle which has ravaged our country's economy and believe things could have been different. Regulators appear to have placed a higher value on protecting the interests of those who sell financial products than on protecting the interests of consumers in transparent, safe, and fair financial products. Our regulatory structure has contributed to that problem.

At present, the mission of protecting consumers on financial matters is divided among many agencies all of which have other responsibilities. Candidates with strong backgrounds on the consumer side hardly ever or in some cases, never, occupy the top posts at the Federal Reserve, the Comptroller of Currency, or the Office of Thrift Supervision. As a result, consumer protection efforts have too often gotten lost.

For example, the Federal Reserve Board waited fourteen years to use the power Congress gave it in 1994 to prohibit unfair and deceptive practices in mortgage lending. Had the Fed acted more swiftly, the economic crisis might have been far less severe. But at an agency whose primary mission is the critical subject of macroeconomics, consumer protection has been seen as a backwater.

The dangerous conditions in the lending marketplace have been aggravated by the ways federal regulators have prevented states from providing protection. For example, state efforts to regulate troublesome credit card practices have been blocked (through the law of preemption) by federal efforts. Similarly, when states began enacting anti-predatory lending statutes in 1999, federal regulators mobilized to bar application of those laws to federal lenders. The CFPA proposal would enable states to take a greater role in protecting their citizens, and also experiment with different solutions to relatively new problems, like those created by predatory lending.

The CFPA would also have the power to help consumers understand their financial obligations. Disclosures go only so far in helping consumers understand overly complex terms--terms that even law professors may struggle with. Disclosures may simply be inadequate in helping consumers deal with some unfair terms, or with products which may be suitable for one group but not the borrowers to whom they are marketed. For example, so-called "exploding ARMs"--mortgages with initial low monthly payments that may leap to far higher payments later--may be fine for those who reasonably expect a substantial rise in income by the time the payments increase, like medical residents, but are recipes for default for those whose incomes are more stable.

Perhaps those of us who have studied and taught consumer protection law are as much to blame as the banks and regulators for the mishaps of the recent past: we were too quiet while they made the mistakes that led to the economic crisis. We law professors have learned from our mistakes. We hope Congress has, too.

Norman I. Silber
teaches consumer law at Hofstra University Law School. Jeff Sovern teaches consumer law at St. John's University Law School.