VIEWPOINT: Create Tools, Not Rules to Truly Protect Consumers

Article excerpt

Byline: Thomas P. Vartanian

Protection of consumers from unfair and abusive practices must be an important goal in a business such as the financial services industry, which relies on public trust to exist. But we still are not protecting consumers effectively because we ignore the important cost-benefit balance that must be achieved.

Congress sought to improve consumer protection when, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, it established an independent consumer protection bureau to oversee the vast array of relationships between consumers and the providers of financial products and services.

The Consumer Financial Protection Bureau, though funded by and nominally housed in the Federal Reserve, is an independent agency with its own presidentially appointed director and its own budget. It gathers in one place all the authority of the federal government to write regulations and issue orders under federal consumer finance laws. Its regulations will apply not only to banks, thrifts and credit unions but also, with few exceptions, to any other provider of a wide range of consumer financial products or services.

Having begun my career in the 1970s as a lawyer in the Office of the Comptroller of the Currency's consumer protection division - where I participated in many multiagency task forces that drafted or interpreted regulations meant to enforce consumer financial protection laws like the Truth in Lending, Equal Credit Opportunity, Home Mortgage Disclosure, Community Reinvestment, and Real Estate Settlement Procedures acts - I long have wondered why consumer protection has not been as effective as it could be.

One answer is that it has relied too much on disclosures that eventually have come to rival "War and Peace" in length and density. Most such disclosures have proven of little use, primarily because they disregard the time, patience and financial literacy of Americans. Yet to move to the other end of the spectrum and restrict the complexity and sophistication of financial products would be equally detrimental if it created a "least-common-denominator" approach to the availability of consumer financial products.

Experience suggests that any disclosure exceeding one page is unlikely to be read, never mind understood. Anyone who has ever taken out a home mortgage knows the feeling of vulnerability that arises simply from being presented with the overwhelming volume of disclosures required by the alphabet soup of federal consumer protection regulations.

Such disclosures on balance actually put consumers at a disadvantage because of their daunting length and complexity; they create merely the veneer of consumer protection.

The financial literacy of the consumer is an indispensable but largely ignored factor in the consumer protection equation. The bureau is being created at a crucial crossroads in the regulation of financial institutions and the way in which consumer financial products are delivered to the public.

Some experts, including the president of the Federal Reserve Bank of Chicago, have urged consideration of alternative approaches to consumer protection, such as consumer financial literacy education that gives people the tools to protect themselves, without denying valuable financial products and services to others. …