By Christopher Maag
You may never have heard of the Consumer Financial Protection Bureau but the new federal watchdog agency, which officially opens its doors today, is huge news in Washington. While many Republicans and banking industry lobbyists have been focused on killing the agency before it assumes its full power, many Democrats and consumer advocates have worked equally hard to make sure it takes effect just as envisioned under last year’s Dodd-Frank financial reform act.
“It’s a big fight in Washington,” says Christopher Arterton, a professor of political management at George Washington University. “But I think it is not something that has really penetrated consciousness of people in the country.”
Nevertheless, many have expressed support for the agency’s stated mission, when it’s been explained to them. Three-quarters of the likely voters polled recently by the centre for Responsible Lending support the idea of a single agency charged with protecting consumers from deceptive practices by financial institutions. Nearly three-quarters (73%) want federal oversight of previously unregulated financial industries—including payday lenders, mortgage brokers and prepaid debit cards—which the bureau is empowered to do.
Even a majority of likely Republican voters, 63%, support federal oversight of unregulated financial companies, the poll found.
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“There’s still a populist view out there among the population that the banks are responsible for the economic downturn, and it’s about time we start regulating for consumer protection,” says Robert Clarke, former Comptroller of the Currency under Presidents Reagan and George H.W. Bush.
Not everybody sees it that way. Many Republicans, banking industry leaders and conservative activists believe that Wall Street didn’t cause the crisis; rather, Wall Street is the best solution to a crisis created by Washington. Creating an entirely new regulatory agency just compounds the problems of bureaucratic inefficiency and micromanagement that led to the last crisis, they argue. (Read our recent story about attempts in Congress to weaken the CFPB.)
“The fact is that any attempt to manage the market is unlikely to work, and the cost of that management ends up being borne by the consumer,” says David John, lead financial markets analyst at the Heritage Foundation, a conservative think tank.
What’s In This for Me?
We wanted to take a step back from the political infighting and take a closer look at what the new Consumer Financial Protection Bureau means for people in a practical sense.
We’ll try to answer this simple question, “What’s in this for me?” First, we’ll take a look at the hopes and expectations of those who support the bureau, who helped create it and who now are fighting to defend it. After that we’ll hear from the bureau’s detractors, who are actively working to curb its power, on why they think it could cause individual consumers more harm than good.
“The trick is to convince people that this massive bureau will actually help them,” says Wendy Schiller, a political science professor at Brown University. “If the Obama administration fails to make that connection between this massive federal agency and regular peoples’ lives, then I think the effort could be in trouble.”
Mortgages Started This Mess. Can the CFPB Fix Them?
Many consumer advocates have high hopes for the Consumer Financial Protection Bureau, partly because the new agency has authority over such a sweeping breadth of financial products.
“The NAACP is particularly pleased to note that the CFPB will be looking at almost every aspect of financial services, including mortgage lending, credit cards, overdraft fees and payday loans,” says Hillary Shelton, lead lobbyist for the NAACP.
There’s a reason Shelton mentioned mortgages first – it’s the first industry the new bureau has targeted for change. If you’ve ever bought a house, you know that you had to sign reams of disclosure documents. You also know that those documents didn’t “disclose” much of anything, since it would take a attorney expert in residential law to decipher most of them.
“The real scandal of the American mortgage system is that these so-called disclosures to homeowners are so voluminous and complex that people don’t know what they’re signing,” says Alex Pollock, former CEO of the Federal Home Loan Bank of Chicago and now a resident fellow at the American Enterprise Institute, a conservative think tank. “We ought to be able to get it all onto one page and say it in a clear straightforward way.”
This could be the first way that the new bureau affects the lives of real consumers. The agency has released different versions of simplified mortgage disclosure forms, and it plans to have a new standard set by July 2012.
The new forms should be just a page or two long.
“That’s something that would be felt by consumers that’s really good,” Pollock says.
Credit Cards, Simplified
The bureau plans to do something similar with credit cards. Currently, consumers must wade through countless lines of fine print to figure out what their credit card agreements actually mean. Consumer advocates believe the CFPB can change that.
“I think one of the first things consumers will see is a real cop on the beat with regard to credit cards,” says Pamela Banks, senior policy council for finance issues at Consumers Union. “It’s about making an informed decision based on information you can read and understand, and being able to make an apples-to-apples comparison of financial products.”
While it hasn’t announced exactly what it wants to do yet, the bureau has signaled that one of its first projects will be to make credit card disclosure forms easier to read.
“The Bureau’s next challenge will be to further clarify price and risk and make it easier for consumers to make direct product comparisons,” the agency wrote in a recent progress report to Congress.
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Fixing the Servicer Slowdown
Whether you believe that it was excessive risk-taking by banks or excessive meddling by the federal government, it’s clear that something went horribly wrong with the national housing market that caused the U.S. economy to crash and burn. The Consumer Financial Protection Bureau has broad authority to oversee mortgage loans, both those written by major banks as well as the largest non-bank lenders.
And there are a lot of problems still to correct, consumer advocates say. Mortgage servicers often pursue foreclosure and loan modification at the same time, which can lead to people losing their homes unnecessarily, according to research by the centre for Responsible Lending. Servicers often lose paperwork, charge abusive fees, and foreclose even when investors are willing to negotiate, the centre found.
The bureau could make a big difference here, some advocates say. By forcing loan servicers to stop wrongful foreclosures, the CFPB could help millions of Americans modify their loans and stay in their houses, says Mike Calhoun President, centre for Responsible Lending.
“Unfortunately for consumers, financial abuses continue today, making the CFPB’s success as important as ever,” Calhoun said in testimony to the Senate Banking Committee. “The CFPB, with its consumer protection mission, is in the best place to establish basic rules of the road to enhance both consumer protection and a robust competitive market.”
If it Smells Like a Bank…
Many companies that don’t look like banks function like banks, such as payday lenders and private education lenders. For example, some private universities have come under fire in recent years for fraudulent marketing practices, and for the schools’ failure to help students graduate and find jobs.
Many lending companies specialize in making loans to students at private universities, and these loans are often made with variable interest rates that soar to as high as 18%, according to a report by the U.S. Public Interest Research Group.
Under the Dodd-Frank Act, the CFPB is to create a private education loans ombudsman, charged with collecting and studying complaints from borrowers about such loans and identifying patterns of abuse. Over time, that could lead to lower interest rates and cheaper loans, which could help more students graduate, some consumer advocates say.
“The agency has authority over all private student lenders, including both banks and non-banks,” according to a report by the Project on Student Debt. “Consumer advocates have called on the CFPB to require mandatory school certification along with other important consumer protections for private loan borrowers.”
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Problems also exist with payday lenders, many consumer advocates say. While payday lenders advertise their loans as ways to deal with occasional financial emergencies, their high fees often trap consumers in a cycle of debt, Calhoun says, often leading to credit card delinquencies and bankruptcies.
The new consumer protection bureau could play a major role in reducing those fees and helping consumers get lower-cost loans from banks that, unlike payday lenders, are regulated by federal law.
“The CFPB will play a critical rule in ensuring a fair, equitable, and transparent consumer marketplace for credit in general, including payday loans,” says Calhoun.
Fixing System-Wide Problems
More broadly, all types of consumer lending still suffer from systemic discrimination against ethnic and racial minorities, says the NAACP’s Shelton. Predatory and payday lenders are far more likely to target African-American and Latino neighborhoods, and race plays a role in dragging down the credit scores of non-white consumers even after legitimate credit issues like income and debts are excluded, Shelton says.
Since discrimination happens across all types of credit, Shelton says, the centralization of consumer protection functions from seven different federal agencies into the CFPB is a big step forward.
“In short, a robust, functioning CFPB will work through rule making, enforcement, and research to ensure a more fair and equitable financial playing field,” Shelton says.
The CFPB has also established an Office of Military Affairs, led by Holly Petraeus, wife of General David Petraeus, formerly head of our forces in Iraq and Afghanistan, and now head of the CIA. This office aims to provide protection and support for military families from the payday and other predatory lenders that Ms. Petraeus observes often set up shop right outside of military bases. Military families, particularly when a member of that family is deployed, are particularly susceptible to illegal financial practices, including predatory mortgages. The CFPB has announced it will partner with the Judge Advocate General’s (JAG) of all five military branches to identify and prosecute financial scams targeted at military families.
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Or, Making the System Worse
Conservative activists tend to agree with consumer advocates on at least one thing: Few consumers have ever heard of the Consumer Financial Protection Bureau.
“I agree, I don’t think most people know about it,” says David John of the Heritage Foundation.
Unlike Democrats and consumer advocates, many Republican leaders and banking industry representatives believe the bureau’s effects on typical consumers will be mostly harmful. Despite Democratic assurances that the bureau already has significant checks on its powers, “this agency that will have unprecedented reach and control over individual consumer decisions—but an unprecedented lack of oversight and accountability,” Senate Minority Leader Mitch McConnell (R-KY) said in a statement emailed to Credit.com.
Pay More, Get Less
The main effect that the Consumer Financial Protection Bureau will have on regular consumers will be to make it more difficult, and sometimes impossible, to find the financial products they need, John says. It’s almost axiomatic. Regulations cost companies money, and companies pass those costs on to consumers. That means the average cost for loans in the form of interest rates and fees will go up.
“There’s an extra regulatory burden that somebody has to pay, and it’s certainly not going to be the companies” paying, John says.
Some products will become so expensive and so over-regulated, that financial companies may abandon them altogether.
“Fewer products available at higher cost” will be the bureau’s legacy, John says. “And that doesn’t really improve the life of the consumer.”
The Hidden Costs of Higher Costs
Increasing the cost of compliance with various regulatory bodies does more than endanger certain financial products, some argue. Smaller financial institutions don’t have the economies of scale to deal with the tidal wave of new regulations coming their way, says Fred R. Becker Jr., president and CEO of the National Association of Federal Credit Unions.
Credit unions may be forced to raise the fees they charge their own members. Small banks may have to close branches in order to hire additional staff to handle all the regulatory filings.
Gradually, the small banking institutions that provide the financial bedrock of many American communities could be eroded.
“Definitely, some small credit unions and community banks could be forced to close,” Becker says.
Big Job, Little Bitty Profile
Whether it helps or hurts the individual consumer, both sides agree that the new Consumer Financial Protection Bureau has the opportunity to change the financial landscape for regular people. It may protect them from abuse, as consumer advocates believe, or it may limit their credit choices and hurt the financial institutions closest to home.
Either way, the bureau is one of those obscure pieces of Washington, D.C. culture that probably should be a little less obscure.
“Yes, I think it will affect the major climate of consumer protection in the financial industry,” Arterton says. “Whether or not this will be recognised by large segments of the American public, I think people have to be more sceptical of that.”
Christopher Maag is Credit.com’s Staff Writer. Chris graduated with honours from the Columbia University Graduate School of Journalism, and has reported for a number of publications including The New York Times, TIME magazine and Popular Mechanics. Reach Chris via email at chris (a) credit.com.
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