American Banker is running an article by Bill Wade (subscription required, but free trial available), a former banker . . . explaining why the banking industry should be in favor of a Consumer Financial Protection Agency. Wade repeats many of the arguments made by consumer advocates such as Elizabeth Warren:
“A Consumer Financial Protection Agency can be the vehicle that restores consumer confidence in our products, our services and our institutions. The customers we serve will always need credit and other banking products . . . What they want is simple, clearly explained products and the comfort that someone is looking out for their best interests when financial products are developed and marketed. . . .
Although the Consumer Financial Protection Agency made it through the House more or less intact, the banking lobby is taking another, better shot at killing it in the Senate, and is planning to use the magic words: “big government” and “bureaucracy.” Elizabeth Warren wrote an op-ed for Tuesday’s Wall Street Journal that lays out the confrontation. For most of the past two decades, many Americans trusted the banking industry–not necessarily to be moral exemplars, but they trusted that the banks were basically doing what was right for customers and for the economy. Then in 2007-2008 that mood abruptly reversed, as it became apparent that unscrupulous mortgage lenders, the Wall Street banks that backed them, and the credit rating agencies had been ripping off mortgage borrowers on the one hand and investors on the other.
The big banks face a choice. They can agree to sensible reforms that protect consumers and rein in the excesses of the past decades. Or they can simply decide to screw customers, but do it openly this time, since they have so much market share it almost doesn’t matter what customers think. How else do you explain, say, Citigroup’s concocting a new credit card “feature” explicitly to get around a new requirement of the Credit CARD Act? Or Jamie Dimon saying that financial crises are something to be expected every five to seven years, so we should just get over it?
Adam Levitin wrote an informative post on Credit Slips a couple of weeks ago; I missed it but it looks like no one in my RSS reader has mentioned it, so here goes. One provision of last year’s credit card legislation limited up-front fees to 25% of the line of credit being offered. First Premier Bank currently offers a card with a $250 credit line, $124 in up-front one-time fees, a $48 annual fee, and a $7 monthly fee. Oh, and a 9.9% APR on purchases. That adds up to $179 that gets billed immediately, and a total of $256 over the first year–more than the credit line. Because this card will become illegal in February, they are test-marketing a new card that has a $300 credit line, $75 in up-frontfees (to conform with the law; there could be a monthly fee in addition), and a 79.9% APR.
This guest post was contributed by Raj Date, head of the Cambridge Winter Center for Financial Institutions Policy and a former McKinsey consultant, bank senior executive, and Wall Street managing director. For further information on the auto dealer exemption, see the recent study by the Cambridge Winter Center.
Over the past several months, Congress has debated ways to strengthen and rationalize consumer protection in financial services. Central to that debate is the proposed creation of a new agency focused exclusively on this issue, the Consumer Financial Protection Agency (the “CFPA”).
Even among proponents, however, there are varying conceptions of the scope and function of the CFPA. For example, the CFPA as envisioned by the House Financial Services Committee would exclude auto dealers from the CFPA’s coverage. The Administration’s original proposal would have included them. Starting this week, the Senate Banking Committee will have to wrestle with the same question.
They shouldn’t have to wrestle long: Even by the low analytical standards applied to hastily arranged, crisis-driven corporate welfare initiatives, the exemption of auto dealers from the CFPA appears profoundly ill conceived. Exempting auto dealers would simultaneously be bad for consumers, bad for industry stability, and bad for what remaining sense of free-market integrity we still have.
Posted in Guest Post
Mike Konczal has a post featuring the Grayson/Clay/Miller amendment to the current Consumer Financial Protection Agency proposal. The basic idea is that the agency would be required to do a periodic, statistical analysis to identify those financial products that were most implicated in causing bankruptcies and foreclosures in each state. The CFPA would then have to announce what these products are and who sold them, and could then take corrective action to restrict those products.
Posted in Commentary
This guest post was contributed by Lawrence B. Glickman, who teaches history at the University of South Carolina. He put the fight for the Consumer Financial Protection Agency in historical perspective in his previous post on this blog.
A recent ad taken out by the “The Center for Consumer Freedom” marks the latest assault by business lobbyists and conservatives on the idea of consumer protection. This organization’s motto — Promoting Personal Freedom and Protecting Consumer Choice — defines consumer freedom as “the right of adults and parents to choose how they live their lives, what they eat and drink, how they manage their finances, and how they enjoy themselves.”
To be clear, I favor the Consumer Financial Protection Agency. I favor it because I think it will be good for consumers. I also like to think that it will be good for small banks relative to big banks. My main argument for this is that should not harm the main competitive advantages of smaller banks, which should be customer service and local underwriting. But I’m still in favor of the CFPA even if it doesn’t help small banks.
John Pottow (hat tip Mike Konczal) agrees on the small bank point. His main argument is that the CFPA should lower fixed regulatory costs by making it easier to get approval for basic products. He also adds this point:
“The current credit market, with its indecipherable multi-page contracts, is not competitive. Actually, that’s not true: It’s perniciously competitive — the competition focuses on better hiding fees in small print. Burying terms in legal documents is an activity where larger banks again hold the advantage. By contrast, a true plain vanilla market would remove the obfuscation and refocus the competition on price. Once more, smaller lenders would benefit from this increased transparency and leveled playing field.”