How Would A Consumer Financial Protection Agency Affect You?

HOT: We are happy to see that Consumers' Union supports the fight against mandatory binding arbitration and favors plans to form a Consumer Protection Agency. We think the agency, however, needs to also regulate homebuilding and will encourage that. This article from the producers of Consumer Reports has many thoughtful reader comments not included here but available at the original post. It also has many useful links. Anyone interested in the arbitration issue should follow the links.

By Alex Chasick, The Consumerist (a division of Consumers Union), 10/09/2009, http://consumerist.com/5378329/how-would-a-consumer-financial-protection-agency-affect-you

Legislation to create a Consumer Financial Protection Agency (CFPA) is making its way through Congress. Interested parties have spoken out ("It sucks!" "It's awesome!"). Now the White House wants to know what you think.

A Consumer Financial Protection Agency would unify the various organizations that regulate parts of the financial services market into a single, streamlined agency. Hopefully. Most of the legislation is necessarily vague (the legislation "Requires the Agency to seek to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services"), in the hopes that it can be applied to nasty new bank practices that we can't even think of yet. Below are some specifics.

The CFPA would have the authority to restrict or ban mandatory binding arbitration. Here's how Consumers' Union feels about mandatory binding arbitration. [HOT presents "ARBITRATION: Mandatory, Binding, Unfair and Everywhere."]

The CFPA would also have the authority to designate fees, charges, or behaviors as unfair, deceptive, or abusive practices, and ban them as the agency sees fit. So if Bank of America, for example, dreams up a new way to screw you that wasn't banned by the recent credit card law, the CFPA could review it, ban it, and start ringing up the fines. Fines for violating these bans range from $5,000 to $25,000 per day.

HOT: We agree with several of the reader comments that big corporations view such fees as simply a "cost of doing business" that's then passed on to consumers. Proposed alternatives include charging the fees directly to corporate officers or charging daily fees per incident.

CFPA legislation would require the Fed to review the consumer credit card market-including credit card agreements, practices, costs, and availability-every two years to judge market innovation, competition, and fairness. This is a good proactive approach that would keep the agency on top of developing issues and potentially dangerous trends and actions.

Importantly, the CFPA legislation treats federal action as a floor, not a ceiling, so individual states would be allowed to enact stronger laws as necessary and appropriate. This is especially important considering that...

One thing CFPA legislation definitely will not address is usury-a cap on interest rates. Earlier this year, a senator attempted to attach a usury cap to the credit card reform legislation that was signed into law; the amendment failed by a large margin and would probably fail again or doom the underlying legislation it was attached to. Fortunately, some states already have existing usury bans that curb excessive interest rates.

The legislation can be read in its entirety here. A (large) handy comparison chart is viewable here. For more information, check out Consumer Reports's financial policy blog, Defending Your Dollars.