Bailout

Even more incentive for the banks to kill the CFPA

By Felix Salmon

Stacy Kaper has a good story today explaining how the CFPA compromise that we seem to be moving towards — putting a toothless agency inside the Fed — is bad not only for consumers but also for banks:

Though the details are in flux, the latest proposal would create a new division inside the Federal Reserve Board that would write new rules for all lenders but have little to no enforcement powers against nonbanks, including check cashers, payday lenders and title insurers…

“We know that the banks will be regulated. If there isn’t effective regulation of the others, then it creates a competitive problem,” said Douglas Elliott, a fellow with the Brookings Institution and a former investment banker with JPMorgan Chase & Co. “They are instinctively looking for a relatively weak agency here, but if it ends up being a weak agency that allows a lot of nonbanks to compete through fraudulent or near-fraudulent behavior, that’s not good for the banking system.”

The problem of non-bank lenders is a huge one: most existing regulatory institutions were created to protect depositors, rather than borrowers, and as a result just about anybody can lend however much they like to whomever they like on whatever terms they like sans any real regulatory oversight at all. That in turn creates a disastrous race to the bottom as banks try to compete with unregulated lenders, and in the end everybody — banks, consumers, non-bank lenders, the lot — finds themselves heaped up, broken and crumpled, in the corner (solution).

The banks know this, of course, and as a result they’re well aware that they have a huge incentive to kill the CFPA outright, rather than allowing it to reside within the Fed. That’s almost the worst-case scenario for them: they get a consumer-protection agency breathing down their necks (even toothless regulators can breathe), while non-bank lenders can act more or less with predatory impunity unless and until they grow above $10 billion in size, stealing customers from banks and gouging them freely.

Since it’s pretty much unthinkable that the bank lobby will ever support a strong independent CFPA with jurisdiction over all financial services companies, then, my feeling is that they’re going to be very happy indeed if nothing comes out of the Senate at all — or, in any case, nothing remotely acceptable to Barney Frank. And since the bank lobby tends to get what it wants, my base case for consumer protection is now a big zero. (Or, rather, the same mess that we’re living with currently.)

At that point, as I’ve said in the past, Elizabeth Warren should just go it alone and create a Consumer Financial Protection Agency entirely unafilliated with the government, which would give out ?consumer friendly? badges for financial institutions which meet its standards, and which would have a high-profile bully pulpit from which to name and shame those institutions which rip off their customers. It’s better than nothing — and in many ways it might even be better than the kind of compromise that Kaper’s talking about, too.

Full post as published by Macroprudential on March 04, 2010 (boomark / email).