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CFPA — wrong solution to wrong problem at wrong time

Consumer Financial Protection Agency: Government Interference at its Worst

The proposal to create the Consumer Financial Protection Agency goes far beyond what its proponents claim. Under the guise of "fixing" the nation's financial and economic problems, the proposal would do nothing of the sort. Instead, it will create a massive new federal bureaucracy to oversee a broad array of businesses outside the traditional banking industry and to govern anything and everything that has any relationship to "consumers" and "financial matters".

The proposal ignores the fact that traditional banks are not the cause of the nation's financial problems and, more importantly, are already subject to more than sixteen different sets of consumer-related statutes and their implementing regulations which are strictly enforced by bank regulatory agencies.

That's right: Traditional banks today are subjected to sixteen separate and distinct sets of federal statutes and their enforcing regulations. This proposal simply moves enforcement and rule-writing authority from the FDIC, the OCC and the Federal Reserve and gives it to this huge, new federal bureaucracy dominated by community action folks and consumer groups.

These are the same people that brought you Truth-in-Whatever and are responsible for the "disclosure" requirements that flood your mailbox. It's the same crowd that clears up every question you ever wanted to know about a real estate closing by making you go through more than fifty pages of "disclosure", pages upon pages that virtually no one reads. Right. More of that makes sense.

This proposal also ignores the fact that prudential oversight and consumer regulation are two sides of the same coin. It separates safety and soundness considerations from consumer enforcement provisions already on the books, and substitutes the governments' preferences for financial products and services in place of yours. Think about that: separating regulation of the financial integrity and health of financial entities from regulation of the products and services they offer.

Moreover, by micro-managing the design, marketing, delivery, and price of financial products, the new agency replaces individual choice and free market competition with central government direction and controls.

Simply put, government officials – not consumers – will be designing and deciding what financial products consumers should have, the terms under which they should be issued and the cost associated with those products and services.

When this happens, it will be bad for consumers. Why? Because consumers are individuals and they're different from one another. They have different needs in different communities. The standard “big government” approach of "one-size-fits-all" ignores this reality and treats everyone as if their circumstances are the same. They're not. In the long run it will work against more consumer options.

This new proposal doesn't just apply to banks. It applies to thrifts, credit unions, finance companies, pay-day lenders, pawn shops, currency exchange businesses and retail stores.

It also applies to mortgage loan servicers, mortgage loan brokers, mortgage insurance companies, real estate agents and appraisers, automobile appraisers, jewelry and antique appraisers, as well as anyone selling credit insurance.

It applies as well to check guarantee firms, consumer reporting agencies, debt collectors, real estate settlement firms, title insurance agencies, real estate leasing agents, automobile leasing entities, financial advisors, credit counselors and financial literacy programs.

And it also will cover tax planners, tax preparers, tax attorneys, data processors, data storage providers and transmission firms, ATM network providers and manufacturers, third-part IT advisors and network security firms.

It will also apply to financial hardware and software firms, stored value card issuers, money services businesses, attorney trust accounts, pre-paid funeral arrangements, and any other activity that this agency chooses to define as "financial."


Who's going to pay for all of that?


Well, you are. The cost of funding this gargantuan new federal agency, tasked as it will be with designing standard government financial products and regulating the countless businesses that offer them will be astronomical. It will be borne by fees imposed on financial entities that will, in turn, be passed on to consumers. And it will cost several billions of dollars each year.

Products and services that are currently popular will no longer be available for many consumers, because traditional bankers will only be offering the “standard” version approved by this new agency. That's the only "safe" thing to do to avoid lawsuits and adverse regulatory actions. If you don't qualify for that product or service, tough.

The proposed agency would have a significant and negative impact on traditional community banks across Oklahoma and across the country. These providers never made one subprime loan and are not responsible for the current crisis, but they get stuck with the bill? That's nuts.

So – what does a traditional bank do in the face of this new monster? Departing from the menu of government-designed products will be risky and costly, making it very difficult – if not impossible – to offer them, so that's really a no-brainer from a manager's stand-point.

That's too bad from a consumer's perspective. Community banks have always enjoyed the advantage of tailoring their products to meet the needs of their local customers. But there will be a lot less “tailoring” because of the new agency.

And larger financial institutions will have greater economies of scale and will be much better situated to absorb these increased costs and risks. That's simply more market-place distortion that's not needed in this current economic environment.

This proposed new federal bureaucratic agency does not address the root causes of the current financial problems. If it did, bankers would be right there in the front lines, working to get it passed.

But this proposal, as it's currently drafted, will not fly. For one thing, it leaves the Securities and Exchange Commission and the Commodity Futures Trading Commission out of its grasp. How smart is that. Let's see, that means that the Bernie Madoff-SEC enforcement mechanism is left intact and the products and services offered by investment houses are not brought within the agency's jurisdiction.

Hmm. Wasn't that where most of the problems were that the legislation is allegedly trying to “fix”?

Like we said, it's nuts.


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