By Julia Caplan

Just last week (December 11, 2009), Congress passed H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009 (Rep. Frank – Financial Services). The bill would create a Consumer Financial Product Agency (CFPA), a new federal body that would focus solely on the safety of consumer financial products such as credit cards, mortgages and payday loans. If successful, the new CFPA would help protect consumers from predatory and unfair lending practices, ensure proper information disclosure about certain consumer financial products, and perform a wide variety of functions to regulate and supervise consumer financial products in the credit, bank account and payments industries. Unlike previous efforts to regulate banks, it would also establish federal minimum standards, not maximum standards, and would allow states to establish their own higher standards if they choose.

In the big picture, the CFPA will greatly improve the current regulatory structure by reducing inefficiencies and putting consumer interests on the table where they belong. Just as the Consumer Product Safety Commission protects consumers from dangerous consumer products, the CFPA will proactively examine new financial products and practices in order to prevent harm to consumers before it happens.

The main arguments for avoiding regulation fall under four categories: 1) the market should and can self-regulate, 2) information is the best tool for protection, 3) consumer protection is separate from, and in conflict with, goals for market stability, and 4) the compliance-based regulatory model is sufficient for industry oversight.

In fact, the current system violates all of these assumptions. Under the current regulatory approach, companies do legally carry out a variety of unfair and deceptive practices, consumers do not have access to adequate information, the market faces added risk due to deceptive practices, and regulators’ hands are tied because they do not have enough power to make new rules.

Yes, consumer responsibility is important. But companies are using deceptive practices that go beyond reasonable consumer expectations, such as:

· setting due dates for bills at 9am, so that payments arriving on the due date incur a late fee;

· crediting payments to lower interest loans before higher interest loans, regardless of consumer preference; and

· re-ordering debit transactions from largest to smallest, so that if an overdraft occurs in a given day, the bank is more likely to be able to apply overdraft fees multiple times.

By creating an independent agency to ensure that consumers of financial products are protected, we help balance the interests of consumers and producers, correcting a major market inefficiency. The CFPA’s rule-making powers, combined with wide authority across the industry will allow it to ban unfair practices much more easily than previously possible. The CFPA’s reporting mandate will help all involved parties – consumers, producers and regulators – know what is happening in the market, understand CFPA’s application of rules, and plan more effectively for the future.

But will it succeed?

In order for the CFPS to fulfill its mission most effectively and efficiently, it:

1. will need to be funded sufficiently;

2. will need minimal requirements for consulting with other regulatory bodies on its actions; and it

3. should focus its public reporting on an “Emerging Trends Report,” which would review the ten most commonly used financial products and identify fee and penalty implementation rates, profit structures for companies, and newly emerging practices and contract terms. This would serve to update Congress on pressing consumer issues, alert consumers to risks they may face, and keep the financial industry “on its toes.”

Here is a link to Consumer Reports’ map of the current regulatory structure, illustrating why this is so important:

http://blogs.consumerreports.org/money/2009/10/cfpa-consumer-financial-protection-agency-house-passes-bill-regulate-industry-consolidate-barney-fra.html