Obama's CFPA: A Bad Divorce in the Making? "Consumer Financial Protection Agency" Would Consolidate Federal Consumer Protection Functions, but Split Them from Bank Safety and Soundness Issues

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"The great temptation in Washington with every financial panic is to play around with the regulatory boxes, said Wayne Abernathy, ABA executive vice-president for financial institutions policy and regulatory affairs at a recent association event. "Government officials want to do something, they feel that's what they were sent here to do, and since they are not in the financial business themselves, they work with what they have, the government agencies."

It's the rare financial debacle that hasn't resulted in a revision to the regulatory scheme. Abernathy reeled off a series of such shifts. Among examples he cited: The Panic of 1907 which led to creation of the Federal Reserve Board, the Great Depression, which spawned the FDIC, and the 1980s S&L crisis that created the Office of Thrift Supervision.

Will the crisis of 2008 lead to a Consumer Financial Protection Agency?

The Administration's far-reaching regulatory reform blueprint was introduced in late June. Of its many parts and pieces, ABA supports some in whole, some in part. But one of several elements that ABA does not support is the creation of a new regulatory body, the proposed CFPA. While the Administration's plan covers many areas, Abernathy said that the CFPA proposal "is the one that will most likely affect the on-the-ground business of banking more than any of the other proposals currently being offered." He added that CFPA "is the worst, most intrusive legislative proposal that I have ever seen, and I've been here working on these issues since 1978."

Two very different views

In the words of Treasury Secretary Timothy Geithner, the Administration supports the CFPA because:

"There is broad agreement that consumer protection needs to be stronger. Achieving this objective requires mission focus, market-wide coverage, and consolidated authority, none of which exist in today's system. That is why we are proposing one agency for one marketplace with one mission-protecting consumers."

ABA President and CEO Ed Yingling testified against the idea in mid-July before the House Financial Services Committee, saying:

"We believe that a separate consumer regulator should not be enacted, and, in fact, is in direct contradiction with an integrated, comprehensive approach that recognizes the reality that consumer protection and safety and soundness are inextricably bound. Consumer protection is not just about the financial product, it is also about the financial integrity of the company offering the product. Simply put, it is a mistake to separate the regulation of the banking business from the regulation of banking products."

Yingling has also made this point in testimony: "Financial integrity is at the core of good customer service. Banks can only operate safely and soundly if they are treating customers well."

Two very different schools of thought on meeting the same goal. Here is a summary of the key issues of the CFPA debate.

What would the Consumer Financial Protection Agency do?

Quite literally, for most purposes, the regulation of banking products would be separated from the banking business. As introduced, in somewhat amended form from the Administration's draft by House Financial Services Committee Chairman Barney Frank (D.-Mass.), the proposed agency would take up the consumer financial regulatory powers of the Federal Reserve, FDIC, the Comptroller's Office, the Office of Thrift Supervision, the National Credit Union Administration, and the Federal Trade Commission, as well as part of what is presently handled by the Department of Housing and Urban Development.

This would include existing rulemaking, research, data collection, examination, and enforcement powers. …