Strong CFPA will end abusive lending



There are countless variations on the American Dream, but for many families, that dream includes two major milestones: starting a family and owning a home.


As they approach those milestones, families often consult a professional for guidance. In preparation for the birth of a child, parents-to-be meet with a physician. In anticipation of purchasing a home, prospective homeowners often meet with a mortgage broker. Most of us aren’t experts in medicine or realty, so we trust others to provide us with sound advice and solid information.

ADVERTISEMENT
But what happens when the person you turn to for advice doesn’t have your best interests in mind? It would be unacceptable for a doctor to make recommendations based on kickbacks from the insurance company instead of the health of a mother and her child. However, that same standard of trust doesn’t apply to mortgage brokers, who have been free (and often paid big incentive payments) to steer a family into a bad loan that can damage its financial future for years to come.

A strong, independent Consumer Financial Protection Agency would crack down on these kinds of abusive lending practices while contributing to a fair, transparent market where consumers know what they’re buying and financial firms benefit from increased confidence in responsible financial products.

Big Wall Street firms, still standing thanks to taxpayer bailouts, are now spending enormous amounts of cash to kill the CFPA and weaken reforms ($382 million in 2009, according to the Center for Responsive Politics). Not surprisingly, their efforts stretch the truth. Some opponents of a strong CFPA have suggested that an independent Consumer Financial Protection Agency would be at odds with the safety and soundness of our nation’s banks. This argument doesn’t hold up.

If, like Alabama Bankers Association CEO Dan Bailey, you define bank “safety and soundness” as the requirements for levels of bank capital, reserves, liquidity and overall credit quality, then it’s hard to claim that the elimination of lending tricks and traps would damage the integrity of a financial institution. If anything, overall credit quality should be improved by the elimination of deceptive financial products.

However, if you define bank “safety and soundness” solely as a bank’s profitability, then it’s true that a financial firm reaping major profits by peddling products designed to strip wealth from working families might not fare so well under the watch of a strong CFPA.

Consumer protections for financial products are not so different than consumer protections for household goods. Not all Americans are certified electricians — the average person probably can’t tell if his or her toaster has faulty wiring. But the Consumer Products Safety Commission does employ experts who can test toasters and make sure they won’t burn your house down.

The reality is that when the Consumer Products Safety Commission cracks down on such a dangerous product, the only companies that are hurt are those selling toasters that burst into flames. Responsible appliance companies that manufacture safe products aren’t hurt in the least. In fact, the knowledge that a consumer watchdog exists to root out dangerous products like incendiary toasters helps bolster consumer confidence.

Because federal regulators have been asleep at the switch in recent years, predatory financial products have gone unchecked and consumer confidence in products offered by American financial firms has been severely damaged. Consumers are more likely to invest and borrow if they know they aren’t about to get scammed.

Another argument against a strong, independent CFPA has been that a strong CFPA would hurt small businesses by subjecting them to more regulation. Actually, the opposite is true: A strong CFPA helps small businesses because they are major consumers of financial products. They are hurt just like a family is when those products are full of tricks and traps.

When faulty financial products blow up the market, small businesses are often the first to feel the impact due to damaged consumer spending and increased difficulty in obtaining credit. Indeed, if strong consumer protections had been in place in 2008, small businesses would have not been hit by this double whammy that has driven many into bankruptcy.

It’s understandable that Wall Street doesn’t want a strong, independent CFPA that will clean up the tricks and traps in financial products because they’ve certainly made a lot of money with those practices. The question is who will stand with Wall Street, and who will stand with the millions of families and small business owners who deserve financial products they can trust.

Merkley is a member of the Senate Banking Committee.