Now that both Houses of Congress have passed a bill to create a consumer financial protection agency, all that remains is to reconcile the two versions so Congress can send a single bill to the president for signature. But the task is not yet complete. Congress must be careful to avoid the trap it has fallen into in the past: creating the appearance of consumer protection, without the reality.
For example, for the first four decades of its existence, the federal Truth in Lending Act, which the new agency is to administer, provided that lenders did not have to provide borrowers with their final mortgage loan terms until the closing. Because few borrowers are willing to walk away from their mortgage at the closing — which might mean also abandoning a new home — this meant the disclosures came too late to be useful, which may in fact have contributed to the subprime bubble. Last summer, new rules took effect, which move the disclosures up to three days before the closing, but even that might be too late to help borrowers.
States are often no better. Consider New York’s elaborate rent-to-own (“RTO”) law. In RTO transactions, consumers “rent” property, such as furniture, making payments until they have purchased the item or choose to return it. Consumers often pay far more than if they had paid cash for the item or taken out a conventional loan. The New York statute creates the impression of consumer protection by limiting the total price to twice the “cash price” of the item. But because the cash price under the statute depends not on what conventional retailers charge for the item, but rather on what RTO merchants charge for the item, the consumer protection is illusory. RTO merchants who make few cash sales have an incentive to charge a high cash price because it doesn’t cost them any business but generates high rental income. The result is that the legislators who voted for the statute could tell constituents that they had protected them from price-gouging RTO merchants while the merchants could continue gouging.
How could the new consumer statute lead to a similar outcome? Some seeds are already in the bills. For example, the Senate bill permits the agency to be overruled by a two-thirds vote of a new council of regulators.
Two-thirds sounds like a high threshold, until you consider that the new council includes representatives of the agencies that had the power to protect consumers but didn’t use it, including one agency that went to court to stop states from protecting consumers. And the council is to decide jurisdictional disputes by a simple majority vote; if the conferees add an expansive definition of jurisdictional disputes, the new council might end up forestalling much consumer protection.
All these examples have in common technical rules, often too complex for consumers to understand easily, that undermine the goal of consumer protection. Opponents of consumer protection will try to persuade the conferees to adopt similar restraints that fly under consumers’ radar. Indeed, that effort has already begun.
Remember the existing agency that sued to block state consumer protection efforts? The Senate bill has provisions that would help that agency bar states’ efforts to protect their citizens yet again.
Congress has made an important effort to protect consumers. It should resist efforts to use complex provisions to undermine that effort by completing the task of providing for a strong, independent consumer financial protection agency, while also permitting the states to protect their consumers. Only in that way will it insure that the new agency does not become another item on the list above.
Jeff Sovern is a professor of law at St. John’s University School of Law and co-coordinator of the Consumer Law and Policy Blog.