As long as Dems are feeling like bringing a fight to Republicans on financial reform, then they should go all in, and include a strong, independent Consumer Financial Protection Agency.
The Baseline Scenario authors Simon Johnson and James Kwak explain why, and the threats to making that independent agency effective, in an op-ed in The Hill.
We have been and remain advocates of a strong, independent CFPA for familiar reasons: the increasing use of product complexity as a way to hide fees; the vastly unequal bargaining power between consumers and the oligopolies that dominate many financial products; the need for uniform standards that apply to non-bank institutions as well as traditional banks; and the abject failure of existing regulators to enforce those laws that did exist....
Given the political appeal of stronger consumer protection, it may be difficult for opponents to take a strong line against a new agency (although the Chamber of Commerce has done its best). So opposition will most likely focus on weakening consumer protection behind the scenes.
One attack will likely be an attempt to subject the CFPA to “adult supervision.” Section 1023 of the current bill, “Review of Bureau Regulations,” already allows the Financial Stability Oversight Council, a committee of regulators, to override any CFPA regulation it finds would endanger “the safety and soundness of the United States banking system or the stability of the financial sector.”
This is a curious provision. As Raj Date has pointed out, it’s not clear what problem this is meant to solve, since “there is no empirical evidence that the over-protection of consumers ever has created systemic risks,” and there’s no precedent for giving heads of regulatory agencies veto power over the actions of a different agency.
It also allows a group of regulators who have historically been far from consumer-friendly to veto the decisions of the CFPA. As currently drafted, this section makes it relatively difficult for the FSOC to override the CFPA. However, opponents of consumer protection will probably attempt to widen the scope of this veto in order to make the CFPA subservient to traditional regulators.
Another threat involves federal preemption of state law. Preemption means that if a state attempts to set a higher regulatory standard than the federal government, the federal standard prevails. During the housing boom, federal banking regulators chose to preempt state laws against predatory lending that might have reined in subprime lending, replacing them with lax or nonexistent federal standards.
The Obama administration proposed to end federal preemption and allow states to set their own consumer protection standards. However, as described by Stacy Mitchell, author of Big-Box Swindle and a senior researcher with the New Rules Project and its Community Banking Initiative, financial sector lobbyists are hoping to cut a deal that restores federal preemption. Expanding preemption could effectively allow the Office of the Comptroller of the Currency to undermine the intentions of the CFPA.
Our economy needs a financial system that serves its customers, not one that sees them as marks to be taken advantage of. This should be one pillar of reform that everyone can agree on. But since everyone can’t agree, supporters will have to be vigilant against attempts to cripple the agency in its infancy.
The financial industry, with a critical ally in Alan Greenspan, are fighting the CFPA, fighting the key element of reform for every American consumer who has a credit card, a car loan, or a mortgage. This is just basic stuff, and an absolute political no-brainer for any Member of Congress in either Chamber who wants to convince he or she is on the side of voting constituents rather than Wall Street banksters.