Consumer Protection Should Work for Consumers
by Tom Donohue
September 08, 2009 at 10:03 AM
Despite the headlines, health care and climate change aren’t the only issues that Congress will consider this fall. Also up for possible consideration is the Consumer Financial Protection Agency (CFPA) Act, legislation that would dramatically reshape consumer finance.
This bill, said to be a response to the financial crisis, would actually just create another big, ineffective government bureaucracy. While there were certainly excesses in the financial services industry that hurt many Americans, the one-size-fits-all approach to consumer finance required by this bill is the wrong answer to the challenges we face.
The CFPA would mandate that all financial institutions offer “plain vanilla” financial products designed by Washington bureaucrats. To offer products that break from this mold, institutions would be required to jump through a number of costly regulatory hoops. Institutions would also be forced to pass judgment on the ability of individual consumers to understand, for example, a mortgage that is not plain vanilla, but may better suit their needs.
The U.S. Chamber supports transparency and plain English disclosure of the risks and benefits of financial products, but this legislation goes too far.
In a country as large and diverse as ours, families and businesses inevitably have different needs. Requiring that these needs be met by one set of solutions is misguided. Financial innovation has been, by and large, a positive force for consumers. It has provided more options, more flexibility, and the ability to customize solutions to fit individual needs. It wasn’t too long ago that credit cards were rare. Today, they are everywhere, with terms and benefits as different as we are. If the CFPA had been around a few decades ago, we may not enjoy the convenience that comes with swiping a card.
The CFPA would also limit access to credit at a time when small businesses need it the most.
Small banks, unlike their larger competitors, may find it difficult to comply with the deluge of new rules. They may also have trouble absorbing the fees that the CFPA would impose in order to finance itself. Instead of stimulating responsible lending, banks may be held hostage by the CFPA. Even for those entrepreneurs lucky enough to secure a loan under the new regime, the cost of borrowing would increase.
Creating the CFPA to deal with consumer finance issues makes about as much sense as dictating the sizes, flavors, and temperature of coffee because a few consumers spilled their beverages and were burned. We must protect consumers, but in a way that protects economic opportunity and consumer choice.
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