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Despite the capitulations, the CFPA will still wind up damaging companies and ultimately hurting consumers. What looks like movement in the right direction is largely a smoke screen to disguise the fact that a Frank designed CFPA will still have power to force the standardization of some products.
Furthermore, Frank has yet to deal with other significant concerns about what the new agency will do to businesses and the market.
In a report released on September 23, the U.S. Chamber of Commerce (USCC) revealed that the CFPA would cause significant harm to small businesses by imposing high fixed costs for complying with the new regulatory burden. These compliance costs are more easily handled by large firms, which have sophisticated legal staff to work through the piles of regulation.
Michael E. Fryzel, former chairman of the National Credit Union Administration said, "The proposed legislation could cause financial institutions to incur additional costs, including those for fees, staff training, and policy development. The higher operating expenses associated with compliance could have a negative impact on the availability of credit." Given that 70 percent of the USCC's 3 million-plus members are small businesses with less than 10 employees, it is easy to understand how overly burdensome new consumer protection rules could cripple growth and lead to many closures.
The USCC also argues that the CFPA would likely reduce small business access to credit, limit start-ups, damage employment opportunities, and favor large financial firms with "one-size-fits all" rules. As Federal Reserve Chairman Ben Bernanke has warned:
There are many issues to consider, including that overly restrictive or burdensome regulations can lead to increases in product pricing or product withdrawals that would overly constrain credit, or in extreme cases, severely impact the availability of responsible credit for consumers.
In addition to limiting credit and expansion opportunities for small businesses, the CFPA would create brain-knotting problems for large firms. Frank's CFPA, like the Obama/Warren version, would require banks to follow both national and state rules for consumer protection. The Wall Street Journal noted that "each state could impose different rules for pricing, product features, repayment schedules, bank capital requirements, consumer disclosure, regulatory reporting requirements, and so on. If each state can set its own rules, expect endless legal confusion over which law prevails when a bank in one state serves a customer in another."
Consider this complication: If Maryland declares a financial product unsafe, could it still be advertised on television in the northern Virginia and Washington D.C. markets where the signal stretches into Maryland? Would someone living in Virginia and working in D.C. not be allowed to use an IRA or 401(k) plan deemed too dangerous by one of those jurisdictions? Without clearly defined federal preemption, large financial institutions could suddenly find themselves subjected to oversight from the attorneys general in every state they do business, a radical shift from the current paradigm.
Unfortunately, the problems with the CFPA go even deeper than that. Consolidating all federal consumer financial protection regulation would divorce "safety and soundness" regulatory oversight from consumer oversight of financial institutions. There is an important complementary relationship between the two that the CFPA would rip apart. As John Bowman, acting director of the Office of Thrift Supervision (a division of the Tim Geithner-run Treasury Department), has said:
Dividing the regulation of safety and soundness and consumer protection would undermine the safety and soundness of the banking system and weaken a regulator's ability to formulate a complete assessment of a financial institution's risk profile.
Fed Chairman Bernanke, recently reappointed by President Obama to another term, has also pointed out this flaw in the CFPA's design:
In the Reserve Banks, the consumer compliance examiners, while specially trained, often share senior management with the prudential examiners. So, at that level, it would not necessarily be a clean transfer. Additionally, the Reserve Bank examiners draw on expertise and knowledge from other areas of the organizations. Those knowledge centers would not be part of the transfer to a new agency... We believe that prudential supervision and consumer compliance are complementary and should not be separated."
This was a proven bad practice at Fannie Mae and Freddie Mac. James Lockhart, the former head of the Federal Housing Finance Agency, has testified that a separation of consumer protection from financial safety and soundness regulation at those government-sponsored enterprises was a definite cause of their downfall.
Smarter, more effective regulation is the answer to fixing consumer financial protection problems. Consumers don't need new layers of regulation leading to more confusion, uncertainty, and lost value. Instead, regulators should focus on vigorous, effective enforcement of current laws against predatory practices and abuse. There is also room for making sure the existing web of agencies covers all regulatory gaps.
As the Consumer Financial Protection Agency stands now, it is President Obama, Elizabeth Warren, and Barney Frank collectively slamming an arm across the collective chest of the nation's businesses and consumers. We're trying to drive an economy here! We don't need to be protected to death.
Anthony Randazzo is a policy analyst for Reason Foundation.