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Published: March 2010

Financial reform must include a strong, independent consumer regulator

Coalition: Financial Reform

Consumer Action joined its coalition members in asking Senator Christopher Dodd, Chairman of the Committee on Banking, Housing and Urban Affairs to ensure that financial reform includes a regulatory structure that is able to truly protect consumers.

Below is an excerpt from the letter:

The consumer, civil rights, labor and community organizations that make up Americans for Financial Reform would like to thank you for offering a comprehensive proposal in the Restoring American Financial Stability Act (RAFSA) to overhaul the nation’s failed consumer financial protection regulatory structure.  In order to provide Americans with the strongest possible protections from lending and financial abuses in the future, the consumer regulator must have rule-making autonomy that does not require the approval of any banking regulator, an independent budget and adequate resources, and broad supervisory and enforcement authority over all types of providers of financial services.  A new federal consumer regulator also should not replace the essential consumer protection role of the states.

We urge you to retain key provisions of Title X of RAFSA that grant the Consumer Financial Protection Bureau significant autonomy and broad rule-writing authority, delete sections that could allow other regulators to inappropriately veto consumer rules, and strengthen the Bureau’s ability to enforce and supervise all players in the lending marketplace, particularly non-bank lenders and banks with assets of less than $10 billion.  We also urge you to provide for a vigorous role for the states to pioneer consumer protection standards and to enforce federal and state consumer laws, and to fill a key gap that leaves consumers without remedies because the Bureau cannot respond to every individual complaint.

I.  Regulatory Independence is the Key to Effective Consumer Protection

Existing bank regulators utterly failed to protect consumers from abusive lending practices because they were not independent of the lenders they regulated and because they subordinated consumer protection concerns to a dangerously shortsighted focus on the near-term profitability of these institutions.  In fact, the current regulatory system places consumer protection in banking agencies, for which consumer protection is not the primary mission, focus, or expertise. Only the establishment of a robust entity, functionally independent in all respects, will protect America’s families from unfair or predatory credit and financial products that can ultimately have a destabilizing effect on not only those families, but the economy as a whole.  It is simply not “reform” to leave the final word over the rules of the game to the same regulators who ignored consumer problems until they grew so large that they sparked the financial meltdown.  That is why Americans for Financial Reform and our member organizations support the creation of a completely independent Consumer Financial Protection Agency.

The RAFSA makes some significant strides in achieving regulatory independence for a Consumer Financial Protection Bureau within the Federal Reserve System.  The Bureau would be led by a director who is appointed by the President and confirmed by the Senate and who has the authority to set the Bureau’s budget as needed, up to a pre-established cap.  Importantly, the RAFSA does not require that the Bureau get sign off from the banking agencies before it can do its job.

The consumer regulator should not be a subordinate part of the Federal Reserve or any bank regulator.  We urge your opposition to amendments 209 and 210 (Shelby) to create non-independent consumer divisions with the Federal Reserve and FDIC.   Consumer protection has consistently taken a back seat at the Federal Reserve to its monetary policy and supervision responsibilities.  The Federal Reserve infamously refused to use broad rule-writing authority it had for many years to address unfair and deceptive mortgage lending and credit card practices until problems in those markets had harmed tens of millions of consumers and Congress threatened to take its this authority away.  The FDIC has only in the last four years taken its consumer protection responsibilities seriously and must always make resolving bank failures its chief priority during periods of crisis.

We urge your support for amendment 263 (Reed) to eliminate the unnecessary and potentially dangerous veto of Bureau regulations by the systemic risk council.  Consumer protections reduce, rather than increase, systemic financial risk.  It was the lack of adequate consumer protections for nonprime mortgages that started the financial crisis.  Any process that permits regulators with a history of indifference or outright hostility to consumer problems to second-guess the Bureau will undermine accountability, impose delay and discourage the Bureau from addressing harmful practices as they are still developing.  Several specific provisions in the bill require the Bureau to actively and frequently consult with bank agencies, such as the requirement that the Bureau consult with these regulators prior to proposing a rule and during the public comment process, that it consider prudential concerns when developing rules, and through the traditional judicial review process under the Administrative Procedures Act through which agencies provided input into each other’s proposed rules.

We urge your opposition to amendment 211 (Shelby) to create a Consumer Protection Council consisting of many of the same bank regulators who have failed to protect consumers.  Creating a new regulatory bureaucracy, rather than streamlining authority in a single regulator, is a recipe for gridlock, turf battles and inaction.

Lead Organization

Americans for Financial Reform

Other Organizations

Visit Americans for Financial Reform to see a list of members in the coalition.

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