In this post I want to underscore why we need a CFPA.  In future blog posts, I hope to come back to what a CFPA will and won’t do.

Simply put, we need a CFPA because the current regulatory structure doesn’t work and it will almost inevitably cause future crises, if not of the scale of the current one, then still too serious to countenance. 

The economic disaster of 2008 is the chief exhibit in showing that the current system doesn't work.  There were many factors behind the economic disaster, but bad consumer credit products were an important factor.  A major lesson from this crisis is that consumer debt can affect global economic stability (no surprise as consumer spending is something like 70% of GDP). 

Unfortunately, the market drives the introduction of bad consumer credit products.  Credit is at core a commodity.  A dollar from Chase is no different than a dollar from Bank of America.  The only way high-cost products that skim consumer surplus are able to compete in the credit market is through price obfuscation.  Some of this obfuscation is through fine-print.  Some is through product design, as complexity and exploitation of consumers’ cognitive biases can mask pricing.  Credit cards have led the way with price obfuscation, but mortgages made up the gap, and other products are not far behind.  Basically, the consumer credit market is a market in which competition often encourages bad products, and this calls for regulatory intervention. 

We have a regulatory system for consumer financial products in place, but the current regulatory structure doesn’t work for three reasons.  First, it fractures consumer protection in financial services over multiple agencies.  Second, it couples consumer protection with an incompatible mission, bank safety-and-soundness regulation.  And third, there is a lack of centralized expertise on consumer financial products in the federal government. 

In the current regulatory structure, consumer protection is an orphan.  Consumer protection in financial services is divided among five federal banking regulatory agencies, the FTC, the Department of Justice, and 50 states (with banking regulators and attorneys general).  And that’s just for banking services (credit, deposit-taking, and payments).  It doesn’t count the additional regulators for securities, commodities, and insurance. 

This fractured system is rife with opportunities for regulatory arbitration by financial institutions, and makes coordination between agencies a major challenge.  The essential nature of the consumer financial services market is hydraulic—regulating one sort of institution or product will merely shift business to another sort of institution or product.  For example, stricter limits on payday loans could well result in a boom in auto title loans.  When agencies have authority over only a part of the consumer financial services market, they are often loathe to regulate lest they just push the problem—and the business—into another agency’s bailiwick. 

Among the alphabet soup of agencies that have consumer protection duties in financial services, there is only one whose primary mission is consumer protection:  the FTC.  The FTC, however, only has jurisdiction over fringe players in financial services; it has almost no authority over banks or thrifts or credit unions.  For the other regulators, consumer protection is thrown in with other missions, and it has often been an afterthought.  The key problem for federal banking regulators (Fed, OCC, OTS, FDIC, NCUA) is that they are charged with ensuring bank safety and soundness.  A bank cannot be safe and sound without being profitable, and abusive and exploitative lending practices are frequently quite profitable (there’s no other reason to engage in them).  If a regulator cracks down on an abusive lending practice, it might endanger its regulatory charge’s safety and soundness.  The result has been that consumer protection almost inevitably takes a back seat to safety and soundness. 

The fracturing of consumer protection in financial services has also inhibited the federal government from building up expertise in the area.  There are many able staffers at various federal agencies who study consumer finance, but their dispersion limits their effectiveness.  It also limits their ability to collect data.  Data is the lifeblood of consumer finance regulation, but the federal government knows shockingly little about mortgages or credit cards or payday loans, for example.  To provide a simple example, the federal government does not know with any precision the volume of credit card debt outstanding.  The Fed tracks revolving debt, but that includes bank account overdrafts and other revolving lines.  Likewise, the federal government lacks detailed knowledge about credit card terms and pricing.  In order to gauge the impact of regulations, that sort of knowledge is essential, and a major reason the federal government doesn’t have the sort of knowledge is that there is no single regulator with a field-wide purview. 

Creating a CFPA would solve the fractured authority problem, would solve the conflicting missions (a/k/a motivation) problem, and would become a locus of knowledge and expertise on consumer credit that would allow for better and more efficient regulation.  It would provide an important bulwark against abusive consumer finance products and practices not just for the next few years while the memory of the current crisis is still fresh, but well beyond the memory horizon.  It might not be failsafe (no regulatory regime is), but the current regulatory system can also be guaranteed to keep producing bad consumer financial products, and that’s something America can’t afford.