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10 Reasons We Need The CFPB Now
The idea of a federal consumer protection agency focused on credit and payment products gained broad and high-profile support because it targets one of the most significant underlying causes of the massive regulatory failures that did so much damage to families and to our economy.
Over many years leading up to the crisis, federal agencies did not make protecting consumers their top priority and, in fact, seemed to compete against each other to keep standards low, ignoring many festering problems that grew worse over time. If agencies did act to protect consumers (and they often did not), the process was cumbersome and time-consuming. As a result, agencies did not act to stop some abusive lending practices until it was too late. And regulators were not truly independent of the influence of the financial institutions they regulated.
The failure of federal banking agencies to stem sub-prime mortgage lending abuses is well documented. From 1994 forward the Federal Reserve Board had explicit authority to stop unfair and deceptive mortgage lending practices. But despite extensive evidence of large and growing problems, they did not use it. In an extreme case of “too little too late” it was not until July of 2008 that mortgage rules were finalized, close to a decade after analysts and experts started warning that predatory sub-prime mortgage lending would lead to a foreclosure epidemic.
Less well known are federal regulatory failures that have contributed to the extension of unsustainable consumer loans, such as credit card, overdraft and payday loans, which are now imposing a crushing financial burden on many families. As with problems in the mortgage lending market, failures to rein in abusive types of consumer loans were in areas where federal regulators had existing authority to act, and either chose not to do so or acted too late to stem serious problems in the credit markets.
Combining safety and soundness supervision – with its focus on bank profitability – in the same regulatory institution where consumer protection regulation was housed magnified an ideological predisposition or anti-regulatory bias by federal officials that led to unwillingness to rein in abusive lending before it triggered the housing and economic crises. Though we now know that consumer protection is in fact vital to ensure safety and soundness in the medium and long term, structural flaws in the federal regulatory system compromised the independence of banking regulators, encouraging them to overlook, ignore and minimize the consumer protection part of their missions.
In what has been called “a race to the bottom,” regulators competed to gain a greater number of regulated banks under their charter by enforcing less stringent regulations, since by doing so they collected greater regulatory fee assessments from their regulated banks. There is a massive conflict of interest in a system where agencies worry that they will lose revenue because regulated institutions can choose to pay another agency to regulate them instead. Even apart from the race to the bottom, the balkanization of regulators resulted in uneven and inconsistent regulation and a lack of transparency.
Taken together, these flaws severely compromised the regulatory process and made it far less likely that agency leaders would either act to protect consumers or succeed in doing so.
Right now, four federal bank regulatory agencies are required both to ensure the solvency of the financial institutions they regulate and to protect consumers from lending abuses.
Several other agencies share authority over other consumer laws.
On July 21, this responsibility is streamlined, and the CFPB becomes the primary rule maker for 18 enumerated consumer laws that govern banks, payday lenders, credit bureaus, debt collectors and others. The CFPB will also gain authority on that date to supervise compliance with those laws for all banks and credit unions over $10 billion dollars; supervision of smaller institutions remains with their prudential regulators under the law.
When a CFPB director is approved, it will also gain full supervisory authority – beyond enforcement power – over certain non-bank lenders, including non-bank mortgage lenders, payday lenders and private student lenders. When a director is approved, the CFPB gains authority over unfair, deceptive and abusive practices by banks or non-banks it regulates.
When it completes a “larger participants” rule, it can gain additional supervisory authority over other large non-bank firms, such as the biggest credit bureaus, debt collectors and auto finance companies, among others.
This report describes 10 reasons, 5 in detail, that we need the CFPB. It starts out with an explanation of each of these predatory lending problems bank regulators manifestly failed to address, explains it through a few consumer stories, and then provides recommendations for early CFPB action to solve the problem. The sections are as follows:
Reason 1: Unchecked predatory mortgages
Reason 2: Unfair credit card practices
Reason 3: Overpriced overdraft fees
Reason 4: The growth of triple-digit payday lending
Reason 5: Lack of consumer legal rights
Reasons 6-10: Private student loan rip-offs, credit bureau mistakes, debt collector problems,unregulated prepaid debit cards, and auto finance scams.
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