Lawmakers Flip the Coin on Consumer Financial Protection

If, as one panel member’s testimony supposes, consumer regulation and financial product safety regulation are two distinct sides of the same coin, then the House Committee on Financial Services flipped the coin over on Wednesday to study both sides.

A hearing on regulatory restructuring and, specifically, enhancing consumer financial products regulation featured testimony from both sides of the coin: the side for a separate regulatory entity charged with overseeing more responsible, accountable and transparent financial products for consumers, and the side against complicating an already complex regulatory framework.

The hearing participants largely agreed on the importance of safe and transparent financial products for consumers, but the hot discussion subject of the day — a separate regulatory body proposed by the administration — generated plenty of divergence in viewpoints, beginning with Congressman Bill Delahunt, who helped work on the proposal for a Financial Product Safety Commission.

Delahunt said the commission’s role would be to reduce consumer risk and enforce more honest and transparent lending practices.

“Like with other products that are crucial to a healthy life like food and medicine, consumers shouldn’t have to worry whether they are being fooled or tricked into buying a subpar product,” he said, according to prepared remarks. “By alleviating Americans of this burden, we can help consumers again borrow with confidence, secure in the government’s ability to protect them from fraudulent, unsafe products.”

But neutering out all the risk — and, possibly, choice — from financial products is not the job of the government, according to Elizabeth Warren, a Harvard law professor and the chair of the Congressional Oversight Panel. Instead, she called for a change in risk-taking behaviors among the consumers themselves.

“The need for personal responsibility is as strong as ever,” she said. “If someone goes to the mall and charges thousands of dollars to buy things they can’t afford, they should have to deal with the consequences. And if someone signs on to buy a five-bedroom home with a spa bath and a media room that they can’t afford, they should lose it.”

On the regulatory side, Warren argued the credit market itself is broken and in need of an overhaul. She proposed a Consumer Finance Protection Agency to reduce systemic risk in the credit system, reduce regulatory burdens by consolidating some financial regulation powers, foster innovation and level the playing field by “putting someone on the consumer’s side.”

The way the system used to work was much simpler than today, according to Warren’s prepared remarks. Consumers could shop around for goods and services and pick the best prices and offerings, and lenders would shop around for the right creditworthiness of potential borrowers. The system broke somewhere along the rush to make larger profits, as lenders offered riskier and more convoluted loans, the terms of which consumers couldn’t understand even if they did wish to shop around, she said.

To top it off, Warren said, complicated regulations in effect allow for — and even encourage — these products, and bad products in the hands of ill-prepared consumers only makes things worse. The issue at stake is not just what the product will do to the consumer’s credit, finances and personal life when it explodes. It’s about the systemic repercussions felt throughout the economy when the whole minefield goes off.

Leveling the playing field to a more transparent set of operations is the only way to avoid this systemic flaw, according to Warren.

“The invisible hand of the market works well only when buyers and sellers both have full information about the value of the items they exchange,” she said.

On the flip side, however, another hearing participant argued the case for better regulation of the lending institutions themselves, not the products they offer. Edward Yingling, president and CEO of the American Bankers Association said there are plenty of consumer protection laws already in place, but consolidating the regulatory authority into one entity will simply complicate an already complex financial regulation system.

He described consumer regulation and financial product safety regulation as two sides of one coin, which cannot be separated.

“We believe that a separate consumer regulator should not be enacted, and, in fact, is in direct contradiction with an integrated, comprehensive approach that recognizes the reality that consumer protection and safety and soundness are inextricably bound,” he said in his prepared remarks. “Consumer protection is not just about the financial product, it is also about the financial integrity of the company offering the product. Simply put, it is a mistake to separate the regulation of an institution from the regulation of its products.”

Instead, he urged improvements to the existing framework and tighter regulation of lending and underwriting systems. He spoke up for small, independent community banks and credit unions that didn’t participate in subprime lending and that are already overburdened by regulatory costs. Instead of punishing community banks and credit unions, Yingling pointed toward the unregulated non-banking sector, which bears much responsibility for the current crisis and which would fall outside any consumer finance safety or financial product regulation.

Write to Diana Golobay.

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