Bankruptcy

In Favor of the Consumer Financial Protection Agency (CFPA)

By John Pottow

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Let's start with the left.  Simply put, people are getting screwed by current financial products, and that's wrong.  No, it's not as simple as self-indulgent consumers gorging themselves on plasmas.  It's that the "play-by-the-rules" families my co-blogger Elizabeth Warren so often champions (and sometimes romanticizes) find themselves subject to rate adjustments, fees, and charges they have no way of knowing, let alone, pricing, in the current price-shrouded contracting environment.  That's wrong, and government should help stop it.

But what of the right?  The right should begrudge the naked market failure apparent in the financial collapse of 2008.  If consumers are over-extending themselves into credit products -- products that, if transparently priced, would never have enjoyed such demand -- then the collapse of the mortgage market can be seen (at least in part) as a consequence of this household-by-household accretion of systemic risk.  I'm all for markets, as are my staunchy liberterian colleagues, but even they would concede that a market should function on transparency and well disseminated information.

This is where CPFA steps in.  It makes clear it's goal is not to stifle innovation and competition.  It even says in the legislation it does not have the authority to impose a national usury cap (sec. 1022(g)).  It says it's "mandate" is "to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services" (sec. 1021(a)).  And what's even more encouraging, at least to a scholar of consumer and commercial law, is its realist focus on behavioural economics (e.g., sec. 1024(a)((3)(B): "In allocating its resources to peform the monitoring required . . . the Agency may consier, among other factors . . .  consumers' undestanding of the risks of a type of consumer financial product or service.") [emphasis added].  That seems a pretty open invitation to recognize what many scholars (and of course practitioners on the streets) have been saying for years: if people don't process and understand what's in a deluge of information, all the disclosure in the world is useless.

As I learn and think more about this regulatory agency, I become increasingly supportive.

Full post as published by Credit Slips on July 07, 2009 (boomark / email).