Support the Consumer Financial Protection Agency Without Weaking State Protections

Why do we need State consumer protection laws, once we have the Consumer Financial Protection Agency (CFPA)?

States must be able to address problems within their borders, before they become nation-wide problems. Purely local problems do not need national legislation. These issues are best dealt with at the State and local levels.

Won’t this result in the CFPA and the States issuing rules on the same topic?

No. Historically, the States have stepped in where Federal policymakers have failed to establish adequate protections. The CFPA is intended to avert such failures in the future. If the CFPA does its job, it will ensure that consumers are adequately protected, and States will not feel compelled to go further. State legislators are subject to the same pressures as all other policy makers, and they do not seek out reasons to push back against the lending industry. Keeping alive the States’ traditional role will provide a backstop against lapses at the federal level and extra assurance that consumers will be appropriately protected. This will also incent industry to cooperate with efforts by the CFPA to issue protections that are appropriately robust and effective.

Are there other advantages to retaining the State’s traditional role in policymaking?

State laws responding to local problems provide useful models and data points for policymakers in other States and at the Federal level. This keeps our policies vibrant and innovative, and enables Federal policymakers to develop best practices based on the experiences of the States.

Click here to continue reading two news clips about the Consumer Financial Protection Agency.

From the New Haven Register:

Coalition pushes stricter oversight

By Cara Baruzzi, Register Business Editor

HARTFORD — Consumer advocates, state lawmakers and Attorney General Richard Blumenthal Thursday renewed a call for stronger consumer protections pertaining to financial products.

Legislation that aims to regulate certain financial products is being considered by the Banking Committee of the U.S. Senate, of which Sen. Christopher J. Dodd, D-Conn., is chairman.

[...]

“A federal Consumer Financial Protection Agency is vital to protecting consumers and the economy from corporate predators who pillage individual finances with junk fees, outrageous interest rates and unreadable contracts,” [Attorney General Richard] Blumenthal said.

The attorney general was joined by state Sen. Bob Duff, D-Norwalk, and state Rep. Ryan Barry, D-Manchester, co-chairmen of the legislature’s Banks Committee, as well as members of Connecticut Citizen Action Group, Connecticut Working Families and other advocacy groups.

“In Connecticut we have taken great strides to rein in certain practices of credit card companies, mortgage lenders and debt advisers, but we also need strong federal standards to establish a foundation that at the same time further empowers states,” Barry said.

From the New Britain Herald, Sept. 11, 2009:

Toasters Are Safer, Why Not Banking Products, Too?

As Congress takes up the issue of financial reform this fall, it should pass legislation that will create a Consumer Financial Protection Agency to protect American consumers. President Obama endorses this new agency, explaining why it is necessary on a recent appearance on The Tonight Show with Jay Leno, remarking: “When you buy a toaster, if it explodes in your face there's a law that says your toasters need to be safe. But when you get a credit card, or you get a mortgage, there's no law on the books that says if that explodes in your face financially, somehow you're going to be protected.”

It may surprise a lot of Americans to hear, but right now, there is not one single agency responsible for regulating financial services companies, like mortgage brokers, credit card companies, or car loan businesses, to ensure they don’t put misleading or dangerous products on the market. Instead, today, we have at least seven agencies that regulate some part of the financial products sold to consumers, yet not one of them has the job of preventing harmful features in consumer financial products.

Given that the main job of these regulators’ is to protect the banks, consumer protection has been secondary. This means that the existing regulators have looked the other way most of the time on unfair credit card practices, triple-digit payday loans, big overdraft loan fees for small debits, confusing fine print, and other consumer problems.

It’s no surprise then that in recent years, millions of consumers have been sold predatory mortgages while the regulators looked the other way, and even more consumers have faced tricky credit card terms that increase the cost of borrowing. In fact, since 1995, regulators have only charged one top ten credit card company with breaking the law, even though consumers have filed numerous complaints.

This is exactly why we need new consumer-focused agency that has direct responsibility to oversee the safety of financial products consumers, which would allow the existing regulators to focus on the safety of the financial system and set up. Just like the financial system needs someone to look out for “systemic risk,” hard-working families need someone to look out for the household risk created by unchecked bank discretion to use deceptive terms, unfair practices, and abusive features in loans, checking accounts, and other financial products.

The goal of the Consumer Financial Protection Agency isn’t to put banks out of business or add regulation. It’s to guarantee safety, encourage innovation of safer products and reduce federal regulatory layers. It would mean that banks would have to compete based on who has the best products, not who has the best marketing strategy or mis-leading materials.

This fall, Members of Congress must do what’s right for America’s consumers and create a Consumer Financial Protection Agency that places consumer protection first, provides for strong federal law as the minimum protection, and lets states do even more to protect their consumers.

Phil Sherwood is Deputy Director of the Connecticut Citizen Action Group (CCAG).