Will Consumers Force Washington to Curb Abusive Lending? Or Not.
- April 15, 2010
- 8 comments
- Posted in Banks & Banking, Consumer Rights, Government, Latest Posts
We need a pro-consumer tea-party march on Washington–an angry march that tells the Senate we won’t take it anymore. Consumers are justly furious with banks that misled them about the costs and risks of their mortgages and credit cards, and skewered them with fees. President Obama wants to create a Consumer Financial Protection Agency, to help guard against yet another round of rip-offs.
But it’s hard going. The CFPA passed the House, after taking a few dings. In the Senate, however, the banks and other lenders hope to chop off its legs. To get a good bill passed, over the influence of the monied banking lobby, the Senators need to feel a swell of consumer rage.
Elizabeth Warren, a bankruptcy specialist and Harvard law professor, first hatched the idea of a Consumer Financial Protection Agency. There are currently seven such agencies scattered around the government, none of which paid any attention to the scandal of subprime mortgages and credit cards. They had the authority to stop many of the abuses but–in the name of “free markets”–didn’t act. They even made things worse. One of the bank regulators, the Office of the Comptroller of the Currency, actively prevented the states from attacking consumer-lending abuses under state law.
The CFPA would scissor out those seven wimpy bureaucracies and replace them with a single,streamlined agency focused entirely on promoting fair consumer lending. It could require clear and simple disclosure, block deceptive features in loans, ban products that don’t meet financial safety requirements (an example would be those 2/28 “exploding” mortgages that forced so many homeowners into default) and investigate credit industry practices. In short, all the things that the traditional regulators were supposed to but didn’t, and with more authority to act.
The House bill exempted auto dealers from the jurisdiction of the CFPA, even though they can earn hidden bonuses by steering you into higher-rate loans. Still, after the vote, the agency emerged with its independence intact. In the Senate, Chris Dodd, a Democrat and head of the Senate Banking Committee, negotiated the bill with Republicans, accepting several of their restrictions. But, in the end, the Republicans voted against it anyway.
The Senate’s bill downgrades the CFPA to a consumer protection bureau housed in the Federal Reserve (yes, that Federal Reserve, that deliberately didn’t interfere with the abusive subprime mortgage market). It retains its independence and separate budget—essential, if it is to have any hope of success. But its regulations can be vetoed by the other banking regulators, if the regs are thought to undermine banking safety and soundness. The banks have been claiming that they’ll be undermined by any restrictions on their power to make whatever loans they want, at any price. “That’s an amazing notion,” Warren says. “They’re saying that, if banks aren’t allowed to trick their customers, they won’t be able to make a profit.” Besides, their safety and soundness has been undermined already–not by government regulation but by their own predatory lending practices.
In Warren’s opinion, the Senate version of the CFPA goes right to the edge of what’s acceptable. “If it loses anything more, it can no longer function to protect families,” she says. “There’s no point in passing a weak agency. We already have plenty of weak agencies that can’t stand up to the banks. We don’t need another one.” What’s more, a weak agency would mislead consumers into thinking that they now had an advocate in Washington, when in fact they’d have no such thing.
If passed, what might the CFPA tackle first? Credit agreements, Warren says. Consumers can’t read their credit card agreements, their overdraft agreements or most other credit arrangements. As a result, they can’t compare costs and risks. “The consumer credit market is broken,” she says, “and that means high, hidden costs for customers and high, hidden profits for lenders.”
The first wrangle over the Senate bill is likely to be what’s called pre-emption. The bill sets the CFPA’s regulations as a floor and allows the states to pass stronger laws if abuses still persist. The banks want the federal law to pre-empt (that is, stop) any actions by the states. They scream that it would all but bring down the banking system if they had to conform to different laws in different states.
But why? They conform to different sales tax laws and different insurance regulations. Behind the scream, they’re hoping to weaken the federal law and then squelch any states that might dare to pass something stronger.
Consumers wouldn’t need more protection if an independent CFPA did its job right. But states’ rights act as a safety net, against the risk that a future regulator would—like many regulators of the recent past—let the industry exploit consumers at will.
The vote for the consumer agency–yes or no–presents the clearest possible choice between banks versus families, Warren says. For families to win, however, their Senators have to know they care. Bus ticket to Washington, anyone? I’ll be first in line.
Tags: consumer financial protection agency, consumer protection, Elizabeth Warren
Regarding credit card agreements, the Federal Reserve Board in 2009 published new simplified disclosure requirements that go into effect July 1 of this year.
Go to http://www.federalreserve.gov/DCCA/RegulationZ/20081218/g-17(b).pdf for sample account opening disclosure
The disclosures include:
(1) an update of the summary box that already comes with every credit card application (Schumer box),
(2) a new requirement that requires a one-page summary of important terms that comes with the card,
(3) new requirements for periodic statements about fees and other important information, and
(4) new requirements about changes in terms.
These new disclosures are based on extensive consumer testing and comments from the public, including many consumer groups. They are designed so that the disclosures provide information people want and need, using words they understand, and in a format and font size that people will notice.
Therefore, there is no need for a new CFPA or any existing agency to create new credit card disclosures. The Federal Reserve Board already has already done this and done it effectively as the samples show.
In addition, much of the information in credit card agreements is required by federal regulations, courts, and contract lawyers. A review of any credit card agreement quickly demonstrates this point. Failure to use the required regulatory or legal terms can result — and has resulted — in lawsuits or citations by an examiner. However, the new tables summarizing important information will mean consumers understand the terms of their account and what they are paying when they use the account.
I can’t agree that the disclosures are clear. Also, these rules were passed only under the pressure of the credit collapse. Until then, the Fed completely ignored consumer surveys and complaints, including important studies by consumer groups of the subprime marketplace. There is no reason to suppose that, once the pressure is off, the Fed won’t back off again.
What’s more, there are many more credit issues–and will be future issues–that the ones in this particular reg. Lenders will find new ways of exploiting borrowers.
A new Consumer Financial Protection Agency would collect all current consumer offices–at the fed, the OCC, the OTC, etc, etc–under one roof, with the sole responsibility for consumer disclosure and protection.
The credit card disclosures referenced are unconnected to the new credit card rule or with any “credit collapse.” The Federal Reserve Board adopted them in December 2008, after a process of review, consumer testing, and input from the public that the Fed began in 2005. Moreover, the disclosure requirements were adopted months BEFORE the credit card bill passed and indeed were not part of that bill.
The point is simply that an argument that we need another new agency because credit card disclosures are not clear is a puzzling and unpersuasive one, given that over a year ago, an existing agency adopted new rules requiring simple, less-than-a page disclosures that actual consumers said they find understandable and useful.
I still think the disclosures are far from clear, and the issue wasn’t only disclosure. The Fed didn’t stop universal default, charging higher interest rates on past purchases, charging fees almost as high as the credit limit for new subprime cards, or allowing “fixed rate” cards to change rates anytime for any reason, among other consumer issues. Nor did they stop the subprime exploding mortgages. It simply wasn’t taking its consumer responsibilities seriously until the credit crash. And don’t get me started on the Office of the Comptroller of the Currency, whichthat stopped states from enforcing state laws against predatory lending by national banks and then did nothing about it at the national level. But anyway, Nedda, thanks for writing.
It appears the Federal Reserve actually did make illegal the practices you list, such as universal default and raising interest rates on current balances, on the same day it adopted the above-mentioned new disclosure rules, (press release from December 18, 2008). This was before the credit card bill was passed the following year. So why do we need yet another government agency to do what a current agency is already doing? If the Federal Reserve needs to do better, there are other ways to accomplish that without recreating another expensive bureaucracy. Without question, the financial crisis has exposed fundamental problems that need correcting, but American taxpayers have enough on their plate without this sort of wasteful approach to doing so.
The CFPA would be be a new agency on top of other agencies. It brings all the disparate consumer agencies under one roof.
Regarding the Fed, consumer groups testified for years–in front of Fed committees–on various abusive lending practices, and presented studies on what was happening in the real world. Everything was ignored until the mortgage and credit collapse.
The Fed’s main job is money supply, fighting inflation and managing–as far as is possible–for growth. Consumers are way down on its list, as we have seen. A consumer agency would have taken the predatory lending abuses seriously and might have helped some consumer avoid the tragedy that befell them.
Whoever wrote this article is a naive idiot. More government intervention = more expense and less choices for consumers. Period!
Your tone is insulting to consumers and promotes proliferation of what is killing this country: lack of personal responsibility for ones actions.
If you are too dumb to read disclosures, you have no business applying for credit or for a loan.
I’m the dumb one who write the article.
But… An excessive attitude of “buyer beware” hands a free pass to crooks. They can do or say whatever they want and if you believe them it’s your fault when they steal money. Sorry — that’s not my view of what the law should allow.
Read disclosures??? I’ve read 350 page prospectuses on single Variable Annuities with living benefits. I defy hotrepos to make hear or tail of them. “Disclosure” is a branch of “conceal,” as practiced today.