Put a New Sheriff on the Block!

The Consumer Financial Protection Agency – A New Sheriff in Washington, D.C.

Have you been wondering why there were no cops on the block when the predatory lenders came knocking?

For a while, there were. Many years before the 2008 financial crisis, state attorneys general (AGs) and other state consumer protection officials started noticing a problem in their communities. Angry consumers descended upon their offices to complain about a new type of predatory-lending in the housing sector. Consumers were being offered deceptive teaser rates on mortgages that later skyrocketed (ARMs or adjustable rate mortgages). There was a raft of undisclosed charges and fees. Unbelievably, some consumers were even conned into swapping their steady 30-year mortgage for one with a supposedly "lower" interest rate. It wasn't until years later that those interest rates ballooned beyond their ability to pay, and they started losing their homes.

In some states, authorities started investigating, demanding answers and cracking down on abusive mortgage lenders and banks. As early as 2002, a group of state attorneys general went to court to force one of the worst offenders, Household International, to repay customers an astounding $484 million and reform its lending practices.

Many AGs recognized the predatory lending boom as a significant national problem, demanding a national response. They understood that a crackdown in one state just chased the crooks across the border to the next. Some looked to Washington, D.C. for help. But rather than jumping on board to clamp down on the phony mortgage machine, federal regulators went in a different direction. The Federal Reserve and the Security and Exchange Commission looked the other way. Worse, in 2003, authorities at the obscure Office of the Comptroller of the Currency issued new rules that preempted state predatory lending laws and protected the banks.

Yup, that's right, top bank regulators in Washington sided with the crooks and not the cops.

Once the heat was off, bank and nonbank mortgage issuers escalated their scams, investment firms Wall Street went wild demanding a greater and greater number of mortgages, which they discovered could be cut up, packaged as investment products, given a triple AAA rating and sold to suckers around the world.

In the summer of 2008 it became apparent that the rampant predatory lending in the housing sector had generated untold billions in "toxic assets" that were threatening to undermine the entire financial system. Just think if it all could have been stopped in the first year or two that the scams was unveiled. Just think if consumers had a top cop working for them in Washington, D.C. and not just at the state level. Maybe the mortgage meltdown could have been avoided.

That is the theory behind the President Obama's proposal to create a new federal regulatory agency called the Consumer Financial Protection Agency (CFPA). The idea originated with Harvard law professor Elizabeth Warren, who now heads the Congressional Oversight Panel (COP) for the bank bailout.

Warren believes that if consumers have a real advocate for them in Washington, these scams can be stopped early before they threaten the entire financial system. The proposed CFPA is modeled on the federal Consumer Safety Product Commission, which polices a wide variety of consumer products from – car seats to toasters – and issues recalls on dangerous products. Warren notes: "It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street—and the mortgage won't even carry a disclosure of that fact to the homeowner."

The new agency will be authorized to crack down on many different types of predatory lending not just mortgages. Have you ever tried to read your credit card agreement? The whole thing? They give new give new meaning to the words "fine print." Somewhere in the 30 page contract you might find the explanation as to why the card you thought had a 9% interest rate ballooned to a 27% interest rate overnight. Of course, why bother to read the agreement when the credit card companies are allowed to change the terms at any time? The CFPA would regulate credit and credit cards across the board, no matter who issues them.

And what about those bank fees? This year, U.S. banks will collect approximately $38 billion in overdraft fees alone, which the Financial Times perceptively notes "is likely to increase public hostility towards the financial sector." And now that we are in a recession largely caused by the banks, are they giving us a break? Not at all. 2009 data shows that ATM fees are up 16% and a slew of other fees are up as well. And in neighborhoods where pay day loan sharks and rent-to-own shops are the primary financial service provider, consumer can pay up to 400% interest without this ever being disclosed. This is why many consumer advocates are calling for a new Sheriff in Washington, D.C. in the form of the CFPA.

As originally proposed this agency will:

• Regulate all forms of consumer credit, deposit, and payment products and services including loan servicing, debt collection, and debt-related services.
• Decide if these companies are offering unfair, deceptive, abusive or unsustainable products or services.
• Require that all disclosures are clear, simple and concise.
• Educate people about all credit matters.
• Come up with a unified mortgage disclosure.
• Require credit card companies to provide calculators that show what the costs are and how long it takes to pay off debt when only making minimum payments.
• Require credit card issuers to offer "plain vanilla" credit cards in addition to other, more complex products for consumers who want basic cards.
• Review mandatory arbitration clauses in consumer financial contracts to assess fairness. If needed, develop standards for fair dispute resolution or ban mandatory arbitration clauses in certain products (such as mortgages).
• Have jurisdiction over debt collectors and debt buyers.

It won't be easy. The Banksters are arrayed against us. According to Wall Street Watch: "The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse."

But there are many more of us than there are of them and numbers can make a difference.

What can you do? Tell congressional leaders that you want a vote on he CFPA without delay!