The conference will be held Sept. 24-25 in Philadelphia. Registration information is available from the first link above.

UPDATE:  The materials for today's TARP Congressional Oversight Panel hearing on the automotive bankruptcies, including my full remarks, can be found here.

The cornerstones of due process are notice and a hearing. It sounds like these consumers were only getting half of that, and without notice that it is going to occur, the hearing does not do much good. From the press release, it sounds like the problem was with the process servers who are alleged to have knowingly failed to serve process. After serving process, the process server files an affidavit swearing that it was done. A false affidavit is akin to perjury, hence the criminal charges against some participants.

Hat tip to Brian Wolfman and Jeff Sovern over at the Consumer Law & Policy Blog for pointing the way to the story.

At the same time, judicial criticism of mortgage servicing is picking up steam. A good example is Bankruptcy Judge Diane Weiss Sigmund's opinion, In re Taylor, released in April. The thoughtful opinion sheds light on the underbelly of mortgage servicing. She details the relationship between local and national counsel, Lender Processing Services (formerly d/b/a Fidelity National), and the mortgage servicer. Among other things, she finds that the attorney signing the proof of claim, a legal document filed with the court, reviewed a "sample" of 10% of the claims that his own signature was affixed to. In Taylor the proof of claim had the entirely wrong person's note attached to it (I wonder about a privacy violation here as bankruptcy documents are public), and an incorrect payment amount.

On a monthly basis, Tara Twomey and I post an updated version of our Mortgage Servicing Resources document to our Mortgage Study website, which also contains our papers on the subject. We are grateful to colleagues from around the country who forward us interesting cases that we collect in this document, but we wish studying mortgage servicing wasn't such a growth industry. We hope the Obama Administration can find a way to shape up mortgage servicers in time to help Americans keep their homes.

Sitemeter says that we have had 783,463 visits during that time (which doesn't count people who read us through a news aggregator like Google Reader). Maybe the 1,000,000th visitor ought to get a prize -- something like a free subscription to our RSS feed. The average visitor stays on our web site for 1 minute and 11 seconds, which at first seemed a disappointingly low amount of time. I am told, however, that by Internet standards it is pretty good and an indication that visitors actually are reading the content on the site. We should all shudder for the future when 1:11 is considered a long attention span.

In the past year, we had a breakthrough with the first time (to my knowledge) that Credit Slips was cited in a court opinion. In approving the sale of General Motors's assets, the judge cited to several of Stephen Lubben's posts. Lubben was a new regular blogger this year, and his insightful posts on Chrysler, GM, and other corporate bankruptcies principally raised the question of why we were not smart enough to have him on board from the start.

It is very rewarding to get a call from a government policymaker or from someone in the media who starts with "I was reading Credit Slips and . . . ." Just yesterday, a local business owner told me he had changed some of his practices because of information on our blog. We started the blog to share our views about credit and bankruptcy policy, and it is wondrous (at least to me) that anyone pays any attention to what I have to say. As I mentioned in the previous post, one of the things that really makes Credit Slips work is our readers. The comments on the blog come from experts who add new insights to what is already in the blog and call us out where they disagree. The debates always remain professional and add to the blog's goals. Thanks to our readers and commenters, thanks to our guest bloggers, and thanks to our regular bloggers for making Credit Slips work so well.

(Thanks to soapylovedeb for the photo, CC BY 2.0)

It seems that we are getting more and more of these sorts of comments on the blog: "Very informative post." /s/ Friendly Mortgage Modifiers.com. Of course, the signature is always hyperlinked to a web page where someone purports to want to help people save their homes. These comments are a transparent attempt to draw traffic to these sites and always will be deleted pursuant to our policy against commercial marketing in the comments.

This blog is devoted to discussions of credit and bankruptcy matters at a policy level and by persons who have some professional expertise in the area. Consumers often find the blog when they are looking for answers to their problems. We have deliberately avoided taking any commercial advertising lest it be misconstrued as our endorsement of the product or service. Using the comments for nothing more than commercial marketing and piggybacking on our bloggers' credibility is wrong and misleading. The frequency and brazenness of these sorts of comments raises the question of whether an industry that has to stoop to such tactics has any legitimate service to offer.

P.S. to our regular readers and commenters -- I was reluctant to post this lest our regular readers and commenters become concerned about violating our policy. One of the things that makes this blog work is our readers are pretty expert in the matters we discuss. Links to professional web sites or similar identifying links are not a problem. Indeed, I'm a fan of non-anonymous comments whenever possible. The sort of comments that are the subject of this post do not try to engage with the substantive discussion and are clearly abusive.

Earlier this week, the not-for-profit American Arbitration Association (AAA) also announced it would stop accepting arbitrations in consumer debt-collection cases until standards or safeguards are established. Big changes appear to be afoot.

After the Senate failed to support changing the Bankruptcy Code to allow judges to do mortgage modifications, it appeared to be a dead issue. The hearing is great news and hopefully an indication there may be some interest in moving the legislation forward. There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know -- who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece -- the stick that makes the program work.

Finally, the study has a very strange observation that there is a moral hazard problem in principal balance reductions, but apparently not for interest rate reductions:  "Balance reductions are appealing to both borrowers in danger of default and those who are not."  Therefore, borrowers might default to get principal reductions.  Sure, that's right, but everyone would also like a lower interest rate too.  I don't see why a principal reduction presents a different level of moral hazard from an interest rate reduction.  In terms of net present value, principal and interest rate are interchangeable (yes, there's an interest deduction, and a principal reduction changes the ability to refinance, but that's not the distinction at issue).  The bigger factor pushing against principal reductions (other than servicer compensation) is an accounting issue.  A principal reduction shows up on the balance sheet immediately.  A reduction of interest just reduces future income.

The more pressing issue is $1 billion of debt that comes due next month. CIT reportedly plans to offer the holders 83.5 if they tender now, and 80 if they tender later. They want to achieve a 90% acceptance rate.

You really could not ask for a better illustration of why out-of-court exchange offers so often fail. Obviously the best place to be is among the 10% of CIT bondholders who don't tender, because CIT will then be contractually bound to pay 100 in August. The problem being that if the 10% swells to 25% -- because everyone has the same bright idea -- the entire exchange offer will fail and CIT will end up in chapter 11.

And then there is the issue of those folks who take 82.5, only to find CIT in chapter 11 this winter. The other $9 billion of debt might want to have a word with them, especially if the filing comes within 90 days of the tender offer.

Pepper spray in ATMs -- what could go wrong there? If this idea comes to the United States, I can just see it now on my bank statement: "$20.00 -- Pepper Spray Fee."

Hat tip to my colleague, Andy Morriss, for pointing me toward this story.

[Value if modified, but would have self-cured] + [value if performs as modified] + [foreclosure value if redefault]≥ [value if self-cured without mod] + [value if foreclosed without mod] 

Bob was a local banker. He lived in the same town where his bank was. He was a loan officer, probably a Vice President, and worked for the bank for years. Bob married his high school sweetheart, raised four or five kids in the town you lived in, belonged to the local optimist club, and attended a local church every Sunday. Bob showed up at most of the civic events in town. You saw him at many of the weddings, christenings, and funerals in town too. Bob knew everybody who was anybody in your town. He also knew a lot of nobody’s as well, but that didn’t matter to him – anybody or nobody, you were from his town and he was the banker.

Bob viewed himself as the guardian of the bank’s money, and the reputation of the bank in the local community was very important to him. When people needed money, they would come to Bob to apply for a loan. There was paperwork to fill out, but it usually wasn’t very extensive. Bob looked at the paperwork to be sure, but Bob knew you, he knew your parents, he knew where you worked, and he knew how much money you made.  Most importantly, Bob had a pretty good idea what sound financial practices were and he cared about your financial well-being because it was tied to his bank’s reputation.

If you tried to borrow money to buy a house or a car you couldn’t afford, Bob would take you aside, puffing on his cigar, and say, “Son [a term applied to all males under 50 years old, sic] there’s no way I can loan you this money because you can’t pay it back. If I have to foreclose on you, my name will be mud in this town…”

Granted, not everything about the Bob’s of this world was good. His typical response to women (“Aw honey, why don’t you come back with your husband to apply for this loan?”), , single women (“can’t your father front you the money for this sweetheart??”), and minorities (“We don’t loan to people buying houses in that neighborhood…”) left a lot to be desired.  But Bob (and more importantly, Bob’s bank) had several characteristics that were lost in our frenzy to deregulate the financial industry; (1)They knew who they were lending money to, and (2) Their financial well-being and professional reputations depended on making good loans that people could pay back.

In making presentations to elderly residents in retirement communities over the past few years, many of them knew Bob or used to be a “Bob” themselves. When they talk about debt, bankruptcy and financial burdens on families now, they don’t talk about overspending (“my kids think money grows on trees”), or  lack of responsibility (“my grandkids are spoiled rotten!! They should get a job and work for living!”) they talk about the demise of Bob the Banker. There are no local bankers to help us with our loans, credit cards, or anything else. The entire concept of due diligence has been thrown completely out the window, leaving the consumer to fend for themselves.  Many of these elderly residents lament the state consumers find themselves in but they admit that, back in the day, there was someone watching out for them.

Bob the Banker is gone to be sure.  But at least some of the seeds of reform for the U.S. credit and debt system lie with the system Bob came from. Those who make loans should hold some of the risk. They should also evaluate whether the borrower can pay back the loan. The loan terms should make sense to both parties (not just the financial MBA who drew up the fine print). There should be financial and reputational penalties for issuing non-performing loans. Is that really too much to ask??

Henry Ford had a good idea.

In January, 1914 he announced to the world that his workers would be paid five dollars a day. The five-dollar day doubled the average wage for auto workers, produced long lines outside of the factory gates, and helped to create a mass market for the Model T and other consumer durables.

For the next 60 years, this basic formula spread. An entire consumer economy was built on steady middle class jobs that paid slowly rising wages from productivity gains. Wage earners accumulated debts when they were young (mortgages, perhaps car loans, small installment loans for other durable goods), and paid those debts off over their working lives with inflation-discounted dollars from slowly rising paychecks. One was supposed to retire owning a house and not owing the world a cent.

By the middle of the 1970s, this system was fraying at the edges. By the start of the recession in 1981, the patient that produced steady jobs at rising wages was dead. U.S. Federal Reserve Chairman Paul Volcker turned his attention to fighting inflation. Interest rates rose, credit and banking was deregulated, investment became more dynamic, and economic recovery started in the late 1980s. Economic growth through the 1990s and up until 9/11 was very impressive, as were productivity gains in the U.S. economy.

But something was gravely wrong, and by the middle of the 1990s some observers were getting worried.  The economy was growing. Real wages and earnings were not. In fact, median before tax family income in 2001 dollars peaked in 1976 ($42,000) and has been nowhere near that level since. Layoffs, job instability, and family income volatility all rose to near record levels. Yet spending and consumption rose almost continuously from 1992 to now as household revolving debt grew from essentially zero in 1976 to over $9,000 per household by 2005. Total consumer debt outstanding went through the roof and has only tailed off in the past 18 months or so.

Slowly but surely In the U.S. we substituted borrowing and lending for getting paid.

There are a variety of reasons why this happened and I’m not accusing anybody of anything (as Uncle Cecil from Texas would say). Productivity rose in the United States during the 1990s and the benefits of those gains did not filter into most people’s paychecks (They were paid to executives). Financial deregulation (which occurred at almost the exact same time as wages stagnated for the average worker) loosened consumer credit markets considerably and produced a secondary market for securitized consumer debt. Outsourcing, downsizing, and the threats of these put a quiet end to the orderly work career and its steadily rising wages and steady employment. Bankruptcies soared.

More importantly, Henry Ford’s original idea (that workers should be treated well in part because they spend money as a consumer outside the office door) was discarded as a quaint old-fashioned notion.  “Let the other guy treat people well, I can’t afford it” seemed to be the individual response of employers around the country and, for a long time anyway, Wall Street loved it. In the business section of the newspaper major downsizing on the front page was accompanied by major jumps in stock prices on the back page.

Over the long term this exposed a classic public goods problem – U.S. consumer purchasing power is something everyone has an interest in but no one has any concrete incentive to contribute to themselves. There are so many alternatives to paying people a decent wage that virtually any alternative is more acceptable than paying people more money or even paying people what they’re worth.

Is this sustainable?? It is difficult to see how. After all, if someone told you that we were going to base the largest developed economy in the world on (a) treating the mass of employees badly, (b) producing many products and services that are consumed offshore and  then (c) loaning these same employees  money to buy the basic goods and services to keep the entire economy afloat,  I would say that someone just walked off a postbellum Southern plantation to sell us on the virtues of sharecropping(!) . 

The current economic downturn gives us an opportunity to think hard about this entire I-borrow-because-I-can’t-get-a-decent-wage system. Simply restoring the ability of banks to loan money is not enough. Instead, the actual real earnings-based purchasing power of the American consumer must be restored.  This is a much tougher task. Loaning people money is not a perfect substitute for paying them, but it is the easy way out. It produces real differences in political and economic power that can’t be ignored. It also isn’t economically sustainable.

Kevin has a delightful sense of humor, which I got to enjoy during his participation in the recent week-long seminar that I organized at Iowa called Borrowing to the Brink: Consumer Debt in America. Kevin's project for the seminar questioned whether Americans' increased access to credit reflects economic growth or masks declining financial security for American families. It's an important question, and I look forward to Kevin's posts on this and related topics concerning the social effects of household financial well-being or distress.

Thoughts? Did I miss anything?

First, the Fraser Institute study begins by observing that advocates of a single-payor U.S. health care system use the assumption that such a system would prevent many U.S. bankruptcies because of the medical debt found among many U.S. consumers filing for bankruptcy. The study states, "We should expect to observe a lower rate of bankruptcy in Canada compared to the United States, all else being equal." First, I'm not sure that is an assumption made by advocates of a single-payor system (and I don't count myself as one of them). Second, the qualifier "all else being equal" is the whole point. There is a lot that is not equal between the U.S. and Canada, and there is no reason to expect bankruptcy rates to be precisely similar. Even on its own terms, however, the Frasier Institute study is highly suspect because of the narrow window it uses for its bankruptcy data.

The Fraser Institute study, which is really just a three-page report of existing data from government sources, used bankruptcy filing data for the calendar years 2006 and 2007 as the "most recent data." Both the Office of the Superintendent of Bankruptcy Canada and the U.S. courts have 2008 data available. For a report that carries a July 2009 date, the years 2006 and 2007 would not seem to be the most recent data available. Authors have to prepare publications in advance of their appearance, but the U.S. data were available in a press release dated March 5, 2009, and the Canadian data appear on a web page that states "modified March 11, 2009." There was surely plenty of time to use the 2008 data for a 3-page paper that has fewer data than this blog post. By limiting the data to 2006 and 2007, however, the report is able to support that the anti-health care reform agenda that the NCPA and the Fraser Institute seem to further.

For both 2006 and 2007, the Fraser Institute study reports a Canadian bankruptcy filing rate of 0.30% of total population or 3.0 for every 1,000 persons. As the table to the right verifies, the Canadian bankruptcy rate for those two years is lower than in the United States, hardly a surprising result given the draconian 2005 U.S. bankruptcy law and the artificial dip in U.S. bankruptcy filings at that time. Here is the thing: for any other year in the past ten years, the U.S. bankruptcy rate is higher than 3.0. Examining the most recent data, as the Fraser Institute study purported to do, would have shown a higher 2008 rate for the United States. For 2009, my projection (approx 1.45 million bankruptcy filings) suggest a U.S. bankruptcy filing rate of about 4.7 per 1,000 total population.

The Office of the Superintendent of Bankruptcy Canada has data on the Canadian consumer insolvency rate based on the population aged 18 and over. Using the adult population as a base certainly makes more sense than using the total population as the Fraser Institute study does, but in fairness, I do not think their substantive results would have differed had they used the adult population to calculate a bankruptcy rate. Combining the Canadian data with data from the U.S. courts and the U.S. Census, the table to the right shows the bankruptcy filing rate for the adult population for both countries. Again, in all years but the two that the Fraser Institute study happened to pick, the U.S. bankruptcy filing rate is higher.

I'll stop there. The facts speak pretty clearly for themselves. Hat tip to Credit Slips reader and commenter AMC for bringing this matter to my attention in a comment to a blog post.

As I was walking through our dean's suite today, it was fantastic to see a gleaming copy of the faculty's newest book proudly on display. The second edition of this wonderful treatise has just become available. The book is organized in a way that will make bankruptcy law accessible to novices. The first edition began each topic with first principles, and Tabb writes in a clear manner that makes any topic understandable. At 1,447 pages, the book also is no quick overview of bankruptcy law. I often used the first edition as a starting point on research topics.

Congratulations to Charles Tabb--my good friend, colleague, and teacher--on the arrival of this new edition. It is sure to become one of the bellwether works in the field.

UPDATE:  The court's decision can be found here.

The issues that the Movants wish to raise on appeal do not rise to matters of public importance.  Rather, the interests that they wish to champion are their own (in the Individual Accident Litigants’ words, “[c]ertifying the . . . appeal will materially advance the . . . determination of their rights against the Purchaser”):  that is, the Movants want certification as to claims of a handful of individual tort litigants who assert, but have not yet even prevailed on, alleged prepetition claims that can and will be addressed in the administration of the chapter 11 cases.

The debtors also argue against a stay pending appeal, and argue that if the court does grant such a stay it should be conditioned on the posting of a substantial bond.  The bankruptcy court hearing on these motions is scheduled to begin right now.

I do think the debtors are right to highlight the extent to which the appellants seem to be pursuing an appeal for the sake of legal clarity -- the federal courts, unlike some state courts (e.g., New Hampshire), have strong rules against issuing "advisory opinions" that clarify the law without influencing the outcome of the pending case.

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.

Absent a stay, the appellants will have to deal with the inevitable mootness and 363(m) arguments -- something they appear ready to address.  As for the direct appeal to the 2d Circuit, I wonder if there is much reason for such an appeal in this instance -- the panel that heard the Chrysler appeal did address the §363(f) issue already, so the appeal in this case is essentially a request for an en banc review of that decision. Of course, for that very reason having the case proceed first to the District Court seems to be an exercise in extreme futility, but I don't see a "waste of time" clause in 28 U.S.C. §158(d)(2).

Another example of the "float a wacky idea to get in the paper" phenomenon, I suspect. 

UPDATE:  Or perhaps not.  The banks are apparently reconsidering.

I do not take the dip in bankruptcy filings as strong evidence that the end of the recession is just around the corner. First, there is the usual caution against reading too much into the ups and downs of a monthly indicator. Over the past eight months, the bankruptcy filing rate went up four time and down four times, although cumulatively the increases have been more than the decreases. (The daily filing rate is 11.7% higher than eight months ago.) Second, although the month-over-month figure is a decline, bankruptcy filings are up sharply on an annual basis. The June 2009 figure is a 32.5% increase over 2008. Over the entire year, projections show that 2009 bankruptcy filings will be 28.2% - 36.4% greater than 2008. As I discussed last month, the long-term trend is toward the same filing rate as before the 2005 bankruptcy law was adopted. Third, bankruptcy filings lag macroeconomic bad news. Yesterday's news about the jump in unemployment shows the U.S. recession is far from over, and those unemployed may show up in the bankruptcy courts much later. People do not run into bankruptcy court the day they are laid off. in our most recent empirical work from the Consumer Bankruptcy Project, more than 50% of bankruptcy filers told us they struggled for more than two years before filing bankruptcy.

Projecting forward, total 2009 U.S. bankruptcy filings will be:

• 1,404,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,593 per day) as they have averaged for the first six months of 2009
• 1,414,000 filings if bankruptcy filings continue at the same daily rate (5,672 per day) as they have averaged for June
  
• 1,494,000 filings if bankruptcy filings for the remaining six months of 2009 constitute the same proportion of total filings as the last six months of 2008 constituted for total filings that year (about 53.2%)

It is often said that bankruptcy experts and family law experts don't know know as much about the other field as we should. That is certainly true for me, but I was surprised to read that a bankruptcy filing could be a negative factor for a family law court deciding a child custody matter. The Bankruptcy Code prohibits discrimination against former bankrupts, but that prohibition applies only in specific situations such as certain state licensing decisions or in employment matters. It would not prohibit a state court from considering a bankruptcy filing in a child custody matter. Still, on the question of fitness to be a parent, an old bankruptcy filing would seem to have little relevance.

Sure enough, Ms. Kaufman is right--there are cases where a family law court cites a party's inability to engage in sound financial management as a factor in a child custody decision. In some of those cases, the family law court refers to a bankruptcy filing as evidence of the party's financial instability. It seems clear from these cases that it is not the bankruptcy filing that causes the problem, but the general inability to manage one's financial affairs that concerns the courts. A ten-year old bankruptcy filing, standing alone and without more evidence of recent financial problems, would not fit this description.

All of this reminds me of an important point that often can be overlooked when talking about bankruptcy. When thinking about a person's financial well-being, a bankruptcy filing is not the problem. Rather, it is a manifestation of other underlying problems. If you don't fix the underlying problems, a bankruptcy filing is not going to help in the long-run. Applied to the child custody situation, it is not the bankruptcy filing but the underlying financial problems that should concern a family law court. Someone who has used bankruptcy to help put their financial problems behind them should not have to fear the bankruptcy filing will be used against them in a child custody case several years later.

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.