A Consumer Financial Protection Agency — It’s About Time!
Renzo Escobar of Fairfax, Va., was the owner of a home worth more than $800,000. A mortgage broker told him he could lower his mortgage payments by refinancing. The federal Truth in Lending Act gives homeowners undertaking such refinancings three days to review the paperwork generated at closing, before money is disbursed.[IMGCAP(1)]Mr. Escobar, who does not read English (and whose real name is being protected to provide confidentiality), never had three days to review anything. Instead, the settlement agent showed up at his home early in the morning, told him he had to sign the papers quickly, and left. Taking advantage of Mr. Escobar’s inability to read English, the settlement agent had him sign (but not date) the TILA document that Mr. Escobar was supposed to sign at the end of the three-day TILA “cooling off— period.Mr. Escobar did not realize the actual terms of his new loan until the servicing company began to send him his monthly statements. When he inquired, he was told that his monthly payment was lower than that of his prior mortgage because the principal unpaid balance of the loan would increase each month. After a year or so, he would owe $20,000 to $30,000 more on the loan.The effect was that Mr. Escobar had exchanged a standard fixed rate loan for one with a negative amortization. When he challenged the transaction, the company pulled out the TILA document, claiming that they had complied with federal law. But Mr. Escobar’s passport showed that he had left the United States one day before he supposedly signed the document in question.The experience of Mr. Escobar is symptomatic of widespread problems in the financial services sector and illustrates why a new federal Consumer Financial Protection Agency is needed. Under the present regulatory regime, there is no one watchdog to look out for the interests of consumers on such common products as mortgages, credit cards, payday loans and bank overdraft fees.Real estate had always been considered a safe investment. But lax consumer protection turned this bedrock of security on its head, precipitating a financial crisis that has rippled throughout the entire economy.Much of the problem can be traced to a fragmented system of regulation, with the federal government pre-empting many of the states’ better-designed consumer protection laws. Seven federal agencies now regulate a potpourri of financial products and services, with noticeable gaps in coverage and inconsistencies in enforcement.A new independent Consumer Financial Protection Agency would remedy this and take the current disparate federal consumer functions and put them all under one roof, while preserving the role of the state to deter unfair, deceptive, abusive, fraudulent or illegal transactions.The new federal agency would have broad authority to protect consumers of credit, savings, payment and other consumer financial products and services, and to regulate all providers of these products and services. It would promote concise and clear information for consumers, and protect consumers from unfair and deceptive practices. The end result would be fair, efficient and innovative financial services markets for consumers, and improved access for consumers to financial services.One of the hallmarks of the new agency would be its promotion of “plain vanilla— contracts. These would be off-the-shelf templates — for filling in the blanks for interest rates, penalty rates and a few other key terms. In so doing, a financial institution would legally satisfy all its federal regulatory requirements and have a regulatory safe harbor.If some banks wanted to offer more complicated products, they could do so, provided they met the same regulatory standards of adequately disclosing risks and explaining costs, in terms plainly and clearly enough for people to understand them.The Obama administration proposes the creation of an independent federal agency whose sole mission is to protect the consumer, as do several Members of Congress.The financial services industry vigorously opposes the creation of an independent consumer protection agency, preferring to keep the status quo. To many observers, the intensity of the opposition comes as a surprise, given that it was the taxpayers who rescued the financial services sector through a massive bailout and continue to provide public subsidies to the industry.Three principles should guide the creation of a federal Consumer Financial Protection Agency:1. Consolidation of the present fragmented federal regulatory system with sufficient authority for the new agency to carry out its mission and accomplish the goal of consumer protection.2. Dispute resolution through an ombudsman to assist consumers in resolving disputes with financial services providers, thereby avoiding protracted and costly litigation.3. Restitution with a Recovery Fund to pay injured consumers — similar to the Fair Fund that is part of securities law.Opponents charge that the new agency will place an undue regulatory burden on the banks and other providers of financial services and will limit consumer choice and hinder innovation. Nothing could be further from the truth. The new consumer agency takes many of its principles from time-tested values in securities regulation, notably full disclosure and safe harbors. The SEC does not dictate what stocks and bonds companies must issue and what securities investors must buy. Neither will the Consumer Financial Protection Agency dictate what credit products can be offered and what consumers can purchase. The consumer agency will instead establish principles and safe harbors in the development, marketing, delivery and servicing of financial products.Some regulators still believe that only minor adjustments are needed, and that if given another chance, they will get it right this time. But our experience tells us otherwise. John Anderson, a landlord from the Jamaica Plain section of Boston, twice testified at Federal Reserve hearings, in 1996 and again in 2004, in opposition to bank mergers. John provided extensive documentation of predatory lending and equity stripping practices that were hurting home ownership and community stability in Boston neighborhoods, especially those with heavy minority populations. He pointed out that convicted felons and others were buying and flipping real estate in Dorchester, Roxbury and Mattapan, using the targeted loan products of a national bank that was regulated by the Federal Reserve. But the Fed failed to act, and we all know the consequences.As a nation, we must learn from past mistakes and assure that history will not repeat itself. We need a federal Consumer Financial Protection Agency, and we need it without further delay.F. Patricia Callahan, a former securities lawyer, is president and general counsel of the American Association of Small Property Owners. Thomas Willcox is a Washington, D.C., attorney.