The big banks are storming Washington, determined to kill the Consumer Financial Protection Agency (CFPA). They understand that a regulator who actually cares about consumers would cause a seismic change in their business model: No more burying the terms of the agreement in the fine print, no more tricks and traps. If the big banks lose the protection of their friendly regulators, the business model that produces hundreds of billions of dollars in revenue -- and monopoly-size profits that exist only in non-competitive markets -- will be at risk. That's a big change.
But there is an even bigger change in the wind: regulating the non-banks. Democrats and Republicans alike agree that the proliferation of unregulated, non-bank lenders contributed significantly to the financial crisis by feeding millions of dangerous financial products into the economic system. Non-bank institutions were active participants in the race to the bottom among lenders. From subprime mortgage loans to small dollar loans, they showed how to wring high fees and staggering interest rates out of consumer lending. Their fine-print contracts, and new tricks and traps, transformed the market.
Despite widespread agreement about the problem, the U.S. has never made a sustained, systemic effort to regulate non-bank lenders. As lending abuses became more obvious, there was no effort to close regulatory gaps and loopholes or to devote federal resources toward the oversight of non-bank institutions. The reasons are many, but one of the most benign explanations is that policymakers for too long assumed that states could deal with the non-banks because the non-bank lenders are often small and often operate locally (although Countrywide showed that state-based organizations can metastasize rapidly). As it turns out, the states actually faced several limitations in reining in these lenders.
States, just like the federal government, were subject to intense lobbying by creditors. In short order, many states changed their rules to undercut basic protections. For example, the consumer finance industry succeeded in rewriting state interest rate regulation to allow for massive increases in allowable effective rates - even when the advertised rate looks far lower and obscures the true cost of credit. In many states, making an end run around local usury laws is now as easy as running around a single fencepost. At the same time, state legislatures face the perpetual lag-behind problem. They are unable to adjust to a rapidly changing financial services market, too slow to identify problems and not capable of changing the laws quickly enough to head off serious problems.
Moreover, resources are always constrained at the state level, and the enforcement of consumer credit laws competes with a wide variety of other state obligations. When consumer credit laws were violated, states often lacked the capacity to undertake serious investigations or to prosecute offenders. Some states made heroic efforts, but others left consumer financial issues far down their priority list.
The problem of enforcement has been exacerbated by a serious structural problem. When an abuse surfaced-for example, a local paper ran a news story about an unfair practice or a consumer group assembled evidence of sharp practices-local officials often responded by jumping on small banks. The non-banks were often scattered and difficult to find, while the biggest financial institutions were typically protected from local prosecution through pre-emption. That left the small banks holding the bag. These small banks, often those with state charters, were the easiest institutions to locate and the cheapest to prosecute-even if they were only tangentially involved in deceptive practices. The result was that the worst offenders slipped away. Non-banks could shut down for a while, and then reappear when the heat was off. In effect, the state enforcement structure benefitted the big banks and the non-banks.
The CFPA presents the first real opportunity to change that harmful structure.
First, the CFPA will regulate consumer financial products across the board-using the same rules for all mortgages or for all small dollar loans, regardless of whether the mortgage or the loan is issued by a national bank, a state bank or a non-bank. The old practice of different sets of rules and different regulatory structures for the same products would disappear. Instead, the CFPA would create a coordinated set of baseline rules applicable across the board.
Consolidated rule-making will also stop the practice of lenders shopping around for the regulator with the weakest rules. Bank holding companies have enjoyed an enormous advantage by having the freedom to structure their many business divisions to exploit regulatory weakness. They can operate a federally chartered bank when preemption is valuable to them. At the same time, they can purchase the products of non-banks in bulk, creating informal partnerships that exploit gaps in the state regulatory system. In fact, the Center for Public Integrity found that 21 of the 25 largest subprime issuers leading up to the crisis were financed by large banks. (Remember this the next time you hear a lobbyist blaming the crisis on non-banks and denying the role of the bank holding companies.) With consistent rules across the board, the CFPA would put an end to these practices.
Consistent rules are important, but, as we now know, it isn't enough to have good rules on the books. There must also be a serious effort to enforce those rules. With the right sources of funding and some smart strategic thinking about how to force non-banks to follow the same rules as other lenders, the entire landscape of consumer lending would change.
From history, we have learned that an agency's source of funding is critical to its success. By allowing the Agency to tax lenders directly -- perhaps a dime for every open credit card account, a quarter for every open mortgage, etc. -- Congress can make sure that the CFPA stays well-funded in the years ahead. The right funding structure will allow the Agency to develop the capacity to go after the non-banks and the dangerous products they originate, and it will insulate the Agency from political efforts to starve-the-regulators into inaction. Moreover, as we now know, the cost of even a well-funded agency is dwarfed by the cost to the government and the economy as a whole of bank failures. The cost of the failure of just one thrift -- IndyMac -- was almost ten times the annual budget of the Securities and Exchange Commission.
New forms of strategic thinking will also be needed. By creating a system for mandatory lender registration, for example, CFPA will be able to keep track of the consumer lenders out there -- something that no current regulators have the tools to do. To encourage compliance, the CFPA can work with other federal agencies -- like the Treasury Department or the Internal Revenue Service -- to identify unregistered lenders. In states that already register certain non-bank lenders, the CFPA can work off those registrations and collaborate with state officials. This is tough work, but a consumer agency with expertise and resources will rise to the challenge.
The CFPA can also get smarter with enforcement by exploiting concentration points, places where small players are effectively grouped together. In the case of mortgage brokers, for example, without the large bank holding companies and their subsidiaries as customers for the loans they place, many would be out of business. Focusing regulatory attention on the buyers would create substantial leverage over the brokers as well. If the sponsors and funding mechanisms for the worst practices go away, so will the worst practices.
There is more that we can do to deal with non-bank lenders, but only if Congress creates a strong CFPA. If we stick with the status quo -- which treats loans differently depending on who issues them and places consumer protection in agencies that consider it an afterthought - we know what will happen because we have seen it happen before. Lenders will continue their tricks and traps business model, the mega-banks will exploit regulatory loopholes, and the non-banks will continue to sell deceptive products. In that world, small banks will need to choose between lowering standards or losing market share, and they will still get too much attention from regulators while the non-banks and big banks get too little. Dangerous loans will destabilize both families and the economy, and we'll all remain at risk for the next trillion-dollar bailout.
Regulating the non-banks hasn't been tried in any serious way. The CFPA offers a real chance to level the playing field, to add balance to the system, and to change the consumer lending landscape forever.
Harvard Law School Professor Elizabeth Warren is currently chair of the Congressional Oversight Panel created to oversee the banking bailouts and first proposed a new federal agency for consumer financial products in 2007.
Originally published on New Deal 2.0
Stay true to yourself. Dissent is no vice for authenticity.
That's the foundation of our Constitution.
That is a typical attitude of Texas Republicans. Blame the victim. It works on everything from rape to fraud.
Why can't the president of the United States talk to school children? Well then, I don't think teachers should be able to talk to them either then. Does anyone else's head hurt?
For all you Constitutional Originalist … regulation of US commerce are one of the purposes of Government …Check out Article I Section 8. Article I also defines the other roles of Government … you should re-read the Constitution, especially Article I!!
17. Remove the extreme effects of the Reagan and Clinton administration and the congressional legislation to deregulate Banks and Financial Institutions.
18. The Federal Reserve must come to congress to set up appropriate legislation aimed at preventing conflicts of interest when some directors of its 12 regional banks own shares of bank holding companies supervised by the Fed.
19. When the TARP money is returned, at least 50% should be taken out of the Bailout system that was set up. Note: legislation may have to be set up to modify the use of returned TARP money.
20. The credit card system has to set up so there are no bailouts for banks issuing credit cards.
21. The United States Government … “We the People” …will not forgive any of the debt owned by banks that accepted Bailout money or the automobile companies accepting Bailout money.
14. If a bank accepts money from the Government through the Federal Reserve or Treasury, than that is similar to FDIC taking over a bank. Hence, the government agency making the loan can set the restrictions, along with removal of executive of the bank.
15. Must remove the Gramm-Leach-Bliley legislation created under the Clinton Administration that permitted the tearing down of the wall, built by Glass-Steagall, separating banks that did risky investing from those that did basic lending. (The mingling of those two helped create a cascade of bank failures during the Depression.) Thus were born Citigroup, Bank of America and J. P. Morgan Chase, behemoths that owned bank branches, bought and sold stocks and shepherded corporate mergers.
9. Moody’s, Standard and Poors, and Fitch should be held responsible for the bond ratings that were factious. They should pay severe penalties for their improper evaluations … the leaders at the time should be thrown in jail … after a somewhat fair trial …
10. Why was congress not informed when the Administration … treasury… the Fed … Mr. Barnake … and other US Government agencies like the SEC lead by Mr. Cox … felt something was not functioning correctly … these Governmental Departments, had the fiduciary responsibility to go to congress and tell all and ask for corrective legislation … all the high-paying officials were negligent ….
11. Why didn’t the appropriate congressional committees, that oversee the actions of business, ask for a session to investigate the problems ???????????? What happened to the oversight given to the financial committees and the governmental agencies???
12. Please stop the double speak … To Big To Fail … is totally outrageous … what you really mean is The company is To Big to Not Bail Out … or … if we don’t bail out this stupid company we will cause a major employment failure around the country … and maybe around the world … no more double speak …
Date: 6/17/2009 10:02:48 A.M. Pacific Daylight Time
From: Teccoord
To: Mr. President, Leaders of Congress, Spinners of all thoughts.
Bank system restructuring, Tarp oversight, and the return of money borrowed ….
1. Go back to the original set up for home loans … 20% down and must have the necessary income to make all payments.
2. No bundling of mortgages …
3. The bank that wants to sell off their mortgage, on a property, must guarantee the mortgage and provide appropriate links as to the origination of the loan and each person who purchases the loan.
4. The banks have to set up a “Mortgage Reserve” equal to 50 percent of the value of the loan or debt …
5. All loan brokers must be licensed by the Federal Banking system that sets up the lending agencies …
6. Get rid of Fannie Mae and Freddie Mac … only need one agency to guarantee loans … remember each bank is now going to guarantee the loans … or else Fannie Mae and Freddie Mac must be required to inform the public about any financial difficulties that they may be having. In the event that there is some sort of financial collapse within either of these companies, U.S. taxpayers must be informed could be held responsible for hundreds of billions of dollars in outstanding debts.
This is hardly a surprise, they like most major corporations and all financial institutions take Americans as "chumps." And if we stand for this, we are.