VIEWPOINT: Consumer Agency a Pandora's Box of Ills

By Couch, Robert M. | American Banker, August 7, 2009 | Go to article overview
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VIEWPOINT: Consumer Agency a Pandora's Box of Ills


Couch, Robert M., American Banker


Byline: Robert M. Couch

On June 17, the Obama administration announced a plan to create a Consumer Financial Protection Agency dedicated to adopting and enforcing consumer protection regulations.

The agency would have jurisdiction over all entities engaged, directly or indirectly, in financial activities. Though well intended, the creation of such an agency fails to address the issues that led to the current economic crisis, and it would cause new problems for both businesses and consumers. It would lead to a patchwork of state laws, increase costs, encourage litigation, stifle product development and sweep up a broad group of businesses into federal regulation and examination. Many of these businesses are already adequately regulated. In short, a CFPA would create more problems than it solves.

In connection with the agency, the president's proposal would remove federal preemption of state consumer protection laws. CFPA regulations would serve as a floor for consumer protections, and states would be encouraged to enact stronger restrictions. States would also be permitted to enforce CFPA regulations. As a result, financial service providers that operate in multiple states would be subject to conflicting regulations and would need to spend resources developing programs to comply with multiple regulatory schemes.

Even the federal rules could be subject to varying and inconsistent interpretation by state authorities. Litigation would probably grow from inadvertent state law violations, leading to higher legal expenses and insurance premium costs for service providers, which would be passed to customers in the form of higher rates and fees.

Banks and other financial firms would avoid jurisdictions with more stringent regulations and enforcement activities, resulting in less competition and options for those states' residents. A CFPA would develop standards for "plain-vanilla" products that providers would offer alongside their alternative products. To push these plain-vanilla products on consumers, a CFPA may require financial experience questionnaires and/or "opt in" certificates before a customer may buy alternative products.

Businesses would be discouraged from spending on product development and, as a result, would be slow to respond to changes in financial market demand. Regulations that prevent unqualified consumers from obtaining high-risk financial products are needed, but a CFPA would inhibit the development of legitimate, beneficial products.

A CFPA would impose a duty of reasonableness on financial institutions in connection with their disclosures and communications with customers. Such disclosures and communications would need to be "reasonable," not just technically compliant and nondeceptive.

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