The Consumer Financial Protection Agency could protect consumers from bad debt

Federal regulators looked the other way for the last 10 years as banks and other lenders aggressively marketed financial products carrying hidden costs and fees—products that crowded out responsible loans that would have been better for borrowers, but would have generated fewer fees for lenders and investors.

 The hundreds of billions of taxpayer dollars currently bailing out irresponsible lenders has only partially filled the crater-sized hole left when their supposedly record profits proved to be an illusion.  This bailout is the second multibillion-dollar bank bailout in twenty years and has cost far more than the savings and loan crisis of the 1990s.  Let’s not let this happen a third time.

 Last week the House Financial Services Committee took a big step toward fixing the failed system that allowed this to happen: It passed a bill that would create the Consumer Financial Protection Agency, which would be dedicated to providing financial safeguards for Americans. The bill now goes to the House Energy and Commerce Committee and then to the full House for a vote.  It’s a strong start, though it must be strengthened before final passage.

 We need this agency to consolidate and streamline existing consumer oversight authority now scattered across several agencies and, by and large, ignored. Don’t believe the scare tactics trumpeted by special interests trying to preserve the status quo. These are the same people who sold the bad products in the first place and then came hat in hand to taxpayers.   These scare tactics—that credit will dry up, that responsible lenders and borrowers will be hurt, that innovation will be stifled—are the same untruths lenders used for the last 14 years to persuade regulators and policymakers to allow ruinous practices to continue.

Let’s not be fooled again.

 The so-called “innovative” products that imperiled our economy were novel only in how they obscured their true costs to borrowers and true risks to investors.  The mirage of easy money to be made from these tricks set off a race to the bottom by lenders and regulators and stifled innovation of any benefit to consumers.  Far from the bounds of healthy free market competition, these corrosive practices distorted the market, hurt millions of families and small businesses, and caused an enormous loss of wealth across the middle class.  The CFPA, if properly constructed, would monitor the consumer financial arena for abuses and curtail them before they became widespread.

 Our current bank supervisory structure failed because it allows bankers to choose their regulator, so they shop for the regulator with the lowest standards.  The supervisers' budgets depend on fees from the banks they oversee, so they work hard to please the very banks they are supposed to police.  In the process, the overseers forgot that safeguarding consumers is in the long term interest of the banking industry.  

Common sense requires that we eliminate these conflicts of interest and ensure that this new agency has the resources to do its job and is independent from the institutions it oversees.  Federal standards must apply across the board so there’s a level playing field where like products are treated alike no matter what kind of lender offers them. A level playing field was the goal the financial services industry held up to persuade Congress to deregulate it a decade ago. Let’s actually create one.

 In addition, the federal standards the CFPA would create must be a floor, not a ceiling. States should not have to wait until local problems become a national crisis before there's talk of help. A new report from the University of North Carolina finds that allowing national banks to ignore state anti-predatory lending laws resulted in more unsafe subprime lending by those banks and, conversely, that states with stronger lending laws were spared the worst of the foreclosure crisis.

Washington will have a hard time justifying a move that would continue to block states from doing what they need to do. In short, the CFPA legislation should restore states' ability to  create and enforce financial safety rules.

Traditionally, America’s consumer markets have been distinguished by standards of fairness, safety and transparency. Financial products shouldn’t be the exception. We need a strong, independent consumer protection agency that’s accountable to the public, free of conflicts of interest and empowered to keep markets free. It’s the only way to restore consumer confidence, stabilize markets and put us back on the road to economic prosperity.

The Center for Responsible Lending is a non-profit, non-partisan research and policy organization based in Durham, N.C., and with offices in Washington D.C. and California.