Will Consumers Force Washington to Curb Abusive Lending? Or Not?

We need a pro-consumer tea-party march on Washington -- an angry march that tells the Senate we won't take it anymore. Consumers are justly furious with banks that misled them about the costs and risks of their mortgages and credit cards, and skewered them with fees. President Obama wants to create a Consumer Financial Protection Agency, to help guard against yet another round of rip-offs.

But it's hard going. The CFPA passed the House, after taking a few dings. In the Senate, however, the banks and other lenders hope to chop off its legs. To get a good bill passed, over the influence of the monied banking lobby, the Senators need to feel a swell of consumer rage.

Elizabeth Warren, a bankruptcy specialist and Harvard law professor, first hatched the idea of a Consumer Financial Protection Agency. There are currently seven such agencies scattered around the government, none of which paid any attention to the scandal of subprime mortgages and credit cards. They had the authority to stop many of the abuses but -- in the name of "free markets" -- didn't act. They even made things worse. One of the bank regulators, the Office of the Comptroller of the Currency, actively prevented the states from attacking consumer-lending abuses under state law.

The CFPA would scissor out those seven wimpy bureaucracies and replace them with a single,streamlined agency focused entirely on promoting fair consumer lending. It could require clear and simple disclosure, block deceptive features in loans, ban products that don't meet financial safety requirements (an example would be those 2/28 "exploding" mortgages that forced so many homeowners into default) and investigate credit industry practices. In short, all the things that the traditional regulators were supposed to do but didn't, and with more authority to act.

The House bill exempted auto dealers from the jurisdiction of the CFPA, even though they can earn hidden bonuses by steering you into higher-rate loans. Still, after the vote, the agency emerged with its independence intact. In the Senate, Chris Dodd, a Democrat and head of the Senate Banking Committee, negotiated the bill with Republicans, accepting several of their restrictions. But, in the end, the Republicans voted against it anyway.

The Senate's bill downgrades the CFPA to a consumer protection bureau housed in the Federal Reserve (yes, that Federal Reserve, that deliberately didn't interfere with the abusive subprime mortgage market). It retains its independence and separate budget -- essential, if it is to have any hope of success. But its regulations can be vetoed by the other banking regulators, if the regs are thought to undermine banking safety and soundness. The banks have been claiming that they'll be undermined by any restrictions on their power to make whatever loans they want, at any price. "That's an amazing notion," Warren says. "They're saying that, if banks aren't allowed to trick their customers, they won't be able to make a profit." Besides, their safety and soundness has been undermined already -- not by government regulation but by their own predatory lending practices.

In Warren's opinion, the Senate version of the CFPA goes right to the edge of what's acceptable. "If it loses anything more, it can no longer function to protect families," she says. "There's no point in passing a weak agency. We already have plenty of weak agencies that can't stand up to the banks. We don't need another one." What's more, a weak agency would mislead consumers into thinking that they now had an advocate in Washington, when in fact they'd have no such thing.

If passed, what might the CFPA tackle first? Credit agreements, Warren says. Consumers can't read their credit card agreements, their overdraft agreements or most other credit arrangements. As a result, they can't compare costs and risks. "The consumer credit market is broken," she says, "and that means high, hidden costs for customers and high, hidden profits for lenders."

The first wrangle over the Senate bill is likely to be what's called pre-emption. The bill sets the CFPA's regulations as a floor and allows the states to pass stronger laws if abuses still persist. The banks want the federal law to pre-empt (that is, stop) any actions by the states. They scream that it would all but bring down the banking system if they had to conform to different laws in different states.

But why? They conform to different sales tax laws and different insurance regulations. Behind the scream, they're hoping to weaken the federal law and then squelch any states that might dare to pass something stronger.

Consumers wouldn't need more protection if an independent CFPA did its job right. But states' rights act as a safety net, against the risk that a future regulator would-like many regulators of the recent past-let the industry exploit consumers at will.

The vote for the consumer agency -- yes or no -- presents the clearest possible choice between banks versus families, Warren says. For families to win, however, their Senators have to know they care. Bus ticket to Washington, anyone? I'll be first in line.

Visit Jane at her blog, JaneBryantQuinn.com
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