Consumer Financial Product Agency

from Baseline ScenarioThree myths about the client financial product agency by Elizabeth Warren is well on paper and timely at Baseline Scenario. I’ve on paper a lot about the creation of a new Consumer Protection Financial Agency (CFPA), starting with an article I wrote in the Democracy Journal in the summer of 2007. My writing has helped me work through the idea and has advanced a conversation about what kind of changes in financial products would be most effective. A couple of weeks ago, I testified before the House Financial Services Committee about why I think a new client agency is consequently important, and I’ve argued the case a lot of times.Today, though, I’d like to post specially about some of the push back that has developed on this issue. In particular, I’d like to focus on three big myths â€" myths intended to defend the same status quo that triggered the economic crisis.MYTH #1: CFPA Will Limit Consumer Choice and Hinder InnovationAt a new hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify single client who chose double-cycle billing to be included within the terms and conditions of his otherwise her credit card contract. It was a great moment. If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they fit for prime mortgages. If the status quo is about choice, then explain why Citibank affirmed itself client friendly, dropped worldwide default, then quietly chosen it up once additional the next day because they supposed consumers couldn’t tell whether they had the term otherwise not.The truth, of course, is that negative client “chooses” to accept the tricks and traps dormant within the legalese of financial products. Rather, consumers must choose among various products with single feature in common: dozens of pages of unintelligible fine print.The CFPA will not limit client choice. Instead, it will focus on putting consumers in a position to make choices for themselves by reform regulations, creation disclosures smarter, and creation financial products easier to understand and compare. The Agency will promote plain vanilla contractsâ€"short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that revelation that runs on for pages is not real disclosureâ€"it’s just a way to hide additional tricks. Real revelation means that a lender has to be able to explain what it is selling consequently that the client can read it and understand it. Once consumers can understand the risk and costs of various products â€" and can compare those products quickly and cheaply â€" the market will innovate around their preferences.Daniel Carpenter, a Professor of Government at Harvard University, has on paper a great deal about the modern pharmaceutical industry. While anyone with a bathtub and some chemicals could be a medicine producer a century ago, Carpenter points out that medicine companies were willing to invest far additional in research and development to bring good drugs to the market once FDA regulations drove out bad drugs and useless drugs. Good regulations support product innovation.MYTH #2: The CFPA Will Add Another Layer of Regulation and Increase Regulatory BurdenCurrent regulations in the client financial area are covered on like pancakesâ€"see a problem and cook up a regulation, but don’t integrate it with the earlier regulation. Today, seven different federal agencies have some form of regulations dealing with client credit. The result is a complicated, fragmented, expensive, and ineffective system. With consolidated and logical authority, the CFPA can harmonize and make additional efficient the narrow systemâ€"while creation it additional effective.But the real narrow break-through for the CFPA would be the promotion of “plain vanilla” contracts that would likely meet the needs of about 95% of consumers. These contracts would have a narrow safe harbor. By using an off-the-shelf template for a plain vanilla contracts and filling in the blanks for interest rates, punishment rates and a few previous key terms, a financial institution can legally satisfy all its federal narrow requirementsâ€"no need to do more.Of course, some banks would want to offer additional complex products. For many, they could file-and-use, consequently long as they met the same narrow standards of adequately disclosing risks and explaining costsâ€"briefly enough and clearly enough for people to understand them.A streamlined new narrow regime would have a serious impact on the credit industry. Today’s complex revelation system favors big lenders that can hire a legion of lawyers to navigate the rulesâ€"and spread the costs among millions of customers. Those complex rules fall much harder on a lesser institution that must navigate the same narrow twists and turns, but with far lesser administrative staffs. Plain vanilla contracts will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward narrow compliance and additional toward client service and innovation.MYTH #3: Prudential and Consumer Regulation Cannot Be SeparatedMake negative mistake: This is a fancy claim for the status quo. If the CFPA can be absent with the current bank regulators, then it can be smothered in the crib. For decades, the central Reserve and the bank regulators (the OCC and the OTS) have had the lawful authority to defend consumers. They have brought us to this disaster by consistently refusing to exercise that authority.The agencies’ well-documented failures â€" discussed in detail by Travis Plunkett and Ed Mierzwinski at this time and by Professor Patricia McCoy at this time â€" are mainly the result of two structural flaws. The first is that financial institutions can now choose their own regulators. By changing from a bank charter to a frugality charter, for example, a financial institution can change from single regulator to another. The regulators’ budget comes in large part from the institutions they regulate. If a big financial institution leaves single regulator, the agency will face a budget deficit and the agency will likely shrink. Knowing this, financial institutions can structure around for the regulator that provides the most lax oversight, and regulators can compete by offering to control less. Regulatory arbitrage triggered a race to the bottom among prudential regulators and blocked-up any hope of real client protection.The second structural reason that prudential regulators unsuccessful to exercise their authority to defend consumers is a cultural one: client defence staff at existing agencies find themselves at the bottom of the pecking order because these agencies are intended to focus on previous matters. At the central Reserve, senior officers and staff wake up every morning thoughts about monetary policy. At the OCC and OTS, agency heads wake up thoughts about capital adequacy requirements and security and soundness. Consumer defence issues areâ€"at bestâ€"an afterthought. The CFPA would create a home in Washington for people who wake up each morning thoughts about whether American families are live on a level field when they buy financial products. By bringing economic experts who care about client financial issues under single roof, CFPA can develop as a smart agency that develops real expertise.A single client agency would also be able to make sure that the same products face the same regulations. Today, mortgages are regulated differently depending on whether they are issued by a bank, a nationally-chartered thrift, a nationally-chartered credit union, and consequently on. Imagine for a instant if toasters otherwise toys had different security standards depending on who artificial them. Or, even worse, imagine if some manufacturers could bypass security standards almost in total â€" as is now the case for non-depository financial institutions. It is time for single Agency to control financial products in a consistent manner crossways the board.In 2001, Canada created an independent agency much like the future CFPA. I just spoke with some Canadian economists, and they not only supposed the system works, they also expressed bewilderment about the idea that prudential and client regulation would be combined. As single said, they “have different ways of thoughts about the world.”At the end of the day, industry lobbyists try hard to invent myths and make belongings sound confusing to threaten the public and to keep policymakers from acting. But this issue is simple: custody security and reliability and client defence together has not ensured security and soundness, has not secluded consumers, has not fostered choice and innovation, and has not minimized narrow burden. In fact, the current narrow structure that combines client defence with previous bank oversight responsibilities has led to the kind of bad narrow oversight that has led us to this crisis. The CFPA would put an important person in Washingtonâ€"someone with real powerâ€"who cares about customers. That’s good for families, good for market competition, and good for our economy.Update: Fixed link to Democracy article in first paragraph. Thanks to Uncle Billy vs. Mont Pelerin.By Elizabeth Warren
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