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Is Barney Frank Weakening the Consumer Financial Agency?

The short answer, per this Journal piece, is yes. The longer, fairer answer is "yes, but," with the but being that he may be making the minimal number of changes he needs to get it through the financial services committee, given the opposition from community banks and their conservative Democratic water-carriers, which I wrote about Monday.

The big changes, according to the Journal, are as follows:

[T]he revised proposal for a Consumer Financial Protection Agency will eliminate the Obama administration's proposed requirement that financial firms offer "plain vanilla" products to consumers, a move banks said would reduce consumer choice.

Financial firms also wouldn't have to abide by a requirement that their disclosures be "reasonable," a requirement many said was too vague and would be hard to enforce.

Additionally, the new proposal would have the CFPA be funded by the Federal Reserve, which suggests that banks wouldn't have to pay any new fees.

What this all means in practice is still a little murky. But at least some of it is worrying. For example, one of the major benefits of a CFPA would be making financial product disclosures easy to understand. As the consumer law experts I cited yesterday point out:

[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.

So this feels like it's moving us in the wrong direction, to say the least.

On the other hand, this particular idea, if designed correctly, could be a relatively painless way to undercut one of the phony arguments the community banks are using to try to preserve the status quo:

The new CFPA proposal will also clarify the process for companies that receive contradictory directives from the consumer agency and their federal banking regulator. In the case of conflicting requirements, companies would be able to appeal the decisions to an independent governing panel, the memo said.

I don't imagine many legitimate instances in which the advice of the consumer product regulator and the safety-and-soundness bank regulator would be at odds. On the other hand, if this ends up being a way for banks to evade consumer regulation by going over the head of the new agency, then that would obviously be a disaster.