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Want to know what is driving Congressional efforts to create a new federal consumer protection agency for financial services consumers?
Research by the Consumer Federation of America shows that consumers are tired of the tricks and traps laden in many financial products and services and want help. A recent CFA survey found that a whopping 90 percent want banks to be required to disclose all mortgage fees upfront, clearly and conspicuously. Eighty-five percent want banks to be required to disclose, on the ATM screen, when a withdrawal will overdraw an account. Weve also found that credit card abuses continue to confound consumers, including practices like arbitrary interest rate increases, unreasonable fee hikes, and cancellations without notice, just to name a few.
Then there are bank overdraft loans, with their quadruple-digit interest rates, and payday, car title and tax refund anticipation loans that can cost consumers annual interest rates of 300 percent to 400 percent. Not surprisingly, a strong majority of Americans (57 percent) support the creation of a Consumer Financial Protection Agency.
In the years leading to our current economic crisis, consumers found themselves between a rock and a hard place. States wanted to rein in a number of financial abuses, but couldnt, because federal regulators had pre-empted much of their authority. Yet at the same time, federal regulatory agencies have often treated consumer protection as less important than or even in conflict with their mission to ensure the safety and soundness of financial institutions. If efforts in a number of states to stop predatory mortgage lending had not been blocked by federal regulators, there is a very good chance that the housing and economic crisis we are in would not have been so damaging.
For example, the Office of the Comptroller of the Currency engaged in an escalating pattern of pre-emption of state laws that were designed to protect consumers from a variety of unfair bank practices and to quell the growing predatory mortgage crisis. This effort culminated in the OCCs 2004 rules pre-empting both state laws and state enforcement of laws over national banks and their subsidiaries. In addition, the OCC developed regulations prohibiting states from enforcing their own fair lending statutes.
Yet states are our nations first responders for many consumer protections, and particularly for financial products and services. The states can stop a local consumer protection concern from becoming a national crisis. For example, states were sounding the alarm on predatory mortgage lending for years, but pre-emption kept them from curbing these abuses. States also need to be able to address local problems that dont need national legislation. The federal government is not particularly effective at responding quickly to local consumer problems.
The Consumer Financial Protection Agency, currently pending in Congress, would solve these problems. The CFPAs sole mission would be to develop, implement and enforce standards that ensure that all credit products offered to borrowers are safe. The CFPA will write the rules under existing laws, plug the holes in current laws to promote fair practices and understandable financial products, handle consumer complaints, and promote the development of products that consumers can understand and use safely.
The legislation to enact this agency calls for the CFPA to provide the floor of consumer protection, allowing states to protect their own residents as they see fit. This will allow states to maintain their traditional role in providing an early warning system to stop abuses before they spread and a backstop against lapses at the federal level.
The large banks that brought us the irresponsible and abusive lending that caused much of this downturn are the same banks that are trying to gut this provision. They claim that they cant deal with different laws in 50 states. But in the past, banks have, and can continue to, provide national products while allowing states to provide consumer protections as needed. It is particularly important to note that banks have complied with state law for most of the 150 years since national banks were created. Only since 1996 have federally chartered depositories gained the broad ability to ignore state consumer protection laws, to, as weve seen, the peril of consumers.
Its also critical to note that other nationwide corporations comply with state laws in many areas, as do banks. Banks do tailor their products to particular niche markets and can adapt to state variations, which are often modest. Despite their claims to the contrary, minor differences in state laws do not prevent banks from marketing products nationally.
Despite the banks claims, when states do pass laws, they are often very similar. The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 is a case in point. The new law gave the states one year to pass legislation to meet minimum licensing and registration requirements for loan originators. The states developed a model law, which has now been enacted or introduced in 49 states and Washington, D.C. This in no way will hurt national commerce, but it will help to ensure that suitable and responsible lending products can thrive in the marketplace.
While it is encouraging that some regulators and even some of the banks are starting to think about what consumers want and need, it is important to understand that much of the motivation for this creative thinking comes from the threat that a real consumer protection agency might enter the scene. We have to remember that the folks fighting this bill are the people who brought our economy to the brink of collapse with their recklessness. Its time to give Americans what they want an agency looking out for them.
Susan K. Weinstock is the director of the Financial Reform Campaign at the Consumer Federation of America.