Argument for a consumer finance protection agency is strong, despite criticism

On Oct. 22 the Consumer Financial Protection Agency Act of 2009 (H.R. 3126) cleared the House Financial Services Committee. The bill would create a new Consumer Financial Protection Agency (CFPA) to police credit cards, mortgages and other Consumer Financial Products (CFPs). The success of the bill in the House committee is an important first step. But many hurdles remain, especially in the Senate.

The CFPA has been the target of much criticism — criticism that aims to derail the CFPA proposal. Congress must see through this criticism.  While the critics are making some valid points, their most powerful arguments have nothing to do with the basic question: Do we need a CFPA? The (almost) uncontested answer to this question is: “Yes, we do.”

 The debate over the regulation of CFPs can be broken down into three questions: Do we need to regulate CFPs? And, if so, who should regulate CFPs? And how should CFPs be regulated?  We can dispense of the first question rather quickly. Even the most ardent champions of the free market concede that some regulation of CFPs, such as basic disclosure mandates, is warranted. If regulatory intervention is warranted, then we can turn to the two regulatory design questions: How should CFPs be regulated? And who should regulate CFPs?

 Much of the criticism levied against the CFPA Act relates to the “how” question: Disclosure regulation may be acceptable, the critics argue, but that’s it. The government should not try to influence the types of CFPs in the market. In particular, opponents of the CFPA argue that the agency should not have the power to define “plain vanilla” products — safe and transparent credit card and mortgage products — that will be immune from legal and regulatory scrutiny. Perhaps the CFPA should not have this power. It is fine to argue that the CFPA should not be granted a specific power. But this should not be confused with an argument that a CFPA should not be established.

 Other critiques are presented as how-to-regulate critiques but are, in fact, who-should-regulate critiques. For example, CFPA opponents argue that it is dangerous to give the new agency the power to ban certain CFPs. Why should the government dictate the type of credit card or mortgage products that consumers are allowed to buy? But, of course, the government already has this power. Congress recently exercised this power when it banned specific features of credit card products in the CARD Act of 2009. 

Perhaps the claim is that regulatory agencies should not have this power.  But regulatory agencies — the Fed and other banking agencies — currently have broad authority to ban “unfair and deceptive” CFPs. So the “how” critiques, if taken at face value, have nothing to do with the CFPA; the critics would lobby to strip the banking agencies of their powers to police CFPs, even if the CFPA was off the table.

 A more realistic interpretation, however, would not take the “how” critiques at face value, but rather reframe them as who critiques:

The power to ban “unfair and deceptive” CFPs is fine when granted to the Fed, but not so fine when moved to the CFPA. The underlying premise must be that the Fed uses these broad powers judiciously, while the CFPA can be expected to employ them capriciously. Even if this prediction is true, this is not an argument against a CFPA. It is, at best, an argument against the proposed mission and regulatory architecture of the new agency. The CFPA’s mission could be cautiously defined and the agency’s structure could be cautiously designed — for example, in terms of setting the number and selection procedures for the agency’s commissioners — to ensure that it uses its powers judiciously, just like the Fed.

 But do we want the CFPA to be “judicious” like the Fed? The CFPA was conceived as a response to serious misgivings about the who-should-regulate question. In particular, the current Fed-led regulatory system suffers from two central problems. First, there are too many regulators: In addition to the Fed, four other banking agencies — OCC, OTS, FDIC and NCUA — and the FTC share power over CFPs. And that’s only at the federal level. This is one case where more is not better. John C. Dugan, the comptroller of the currency, in his testimony before Congress, conceded that the “patchwork of authorities scattered among different agencies” led to consumer protection rules that “were in some cases not sufficiently robust or timely.”

 The second problem is the mismatch problem. Focusing on the federal level, the banking agencies have the authority to police CFPs, but they have little motivation to vigorously protect consumers. Consumer protection is simply not their central mission; safety and soundness are. On the other hand, the FTC, for which consumer protection is the main mission, was stripped of the authority to regulate banks. The result: Regulators with authority to police CFPs lack the motivation to do so and the regulator with motivation to protect consumers lacks authority over important CFP sellers.

 The CFPA, by consolidating the power to regulate CFPs in a single agency dedicated to consumer protection, solves both the multiple regulators problem and the mismatch problem. To effectively challenge the need for a CFPA, critics must either contend that these problems are insignificant or offer alternative solutions. For the most part, they have done neither.

Bar-Gill is a professor of law and co-director for the Center for Law, Economics and Organization at New York University School of Law. He is co-author, with Elizabeth Warren, of Making Credit Safer.