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Why the Status Quo in Consumer Financial Regulation Stinks

In my cranky item yesterday arguing against a proposal for consumer financial regulation being floated by a group of Blue Dog Democrats, I mentioned the problem with combining consumer regulation and safety and soundness regulation of banks (that is, the status quo the Blue Dogs basically want to preserve), and with putting a big council of regulators rather than a single agency in charge of the former (that is, the way the Blue Dogs want to make the status quo much worse).

It turns out that, over the weekend, a group of prominent consumer law professors sent a letter to the leadership of the Senate Banking and House Financial Services Committees driving those points home (not online, unfortunately):

[T]he Federal Reserve Board waited fourteen years to use the power Congress conferred upon it in 1994 to prohibit unfair or deceptive practices in mortgage lending; had the Fed acted timely, the subprime crisis might have been less severe. As the sub-prime mortgage market exploded with unfamiliar and dangerous instruments, federal bank regulators failed to act decisively to improve the situation, under pressure from vendor constituencies that encouraged non-regulation. When regulators belatedly got together in October 2006 to try to respond to widespread consumer difficulties in understanding nontraditional, hybrid mortgage products, the different agencies provided limited guidance but they could not jointly address hybrid instruments because of the difficulty agreeing among themselves, and these instruments remained unregulated.”

The letter also makes some great points about the need for consumer financial product regulation, for those who still aren't convinced. In particular:

It has become increasingly clear that existing disclosures of the costs and terms of many consumer financial products do not adequately inform consumers about the actual costs. For example, a 2007 Federal Trade Commission study found that many borrowers were not able to determine mortgage loan terms or costs from the disclosures in use at the time of the study. If disclosures alone were adequate to enable consumers to obtain appropriate loans, it would not be possible for mortgage originators to “steer” borrowers who could qualify for prime loans to more expensive subprime loans, and yet such steering has been alleged repeatedly.

See this, too:

The literature concerning the difficulties with binding consumer arbitration for consumers is extensive. Studies have found the arbitrators find for companies against consumers 94 to 96% of the time, suggesting that arbitration providers are responding to the incentive to find for those who select them: the companies that insert their names in their form contracts. The recent case brought by the Minnesota Attorney General, charging the National Arbitration Forum with deceptive trade practices and false advertising, which terminated in a consent decree under which the NAF agreed to stop accepting new consumer arbitration cases, only emphasizes the importance of regulating predispute consumer arbitration. The CFPA would have the ability to regulate consumer arbitration to insure that it is conducted fairly, or, if that proves impossible, to ban it altogether.