How Will the Regulatory Reforms Affect Consumers?

Douglas J. Elliott
Douglas J. Elliott Former Brookings Expert, Partner - Oliver Wyman

June 18, 2009

Dougals Elliott and others weigh in on the Obama administration’s new consumer protection proposal on PBS’s The Business Desk with Paul Soloman.

The biggest benefit for consumers from the reforms is the least tangible – a stronger financial system. This crisis has demonstrated vividly how important it is to have a working banking system that can provide the lending necessary for our economy. The proposed reform should limit the damage from future problems, although nothing can eliminate trouble altogether.

The establishment of a financial regulator specifically focused on consumer protection is both good and bad. It is clearly positive that we are focusing more on these problems. Consumers suffered massively in this crisis from bad mortgage products that were hard to understand, ill-designed, and sold to people who shouldn’t have bought them. The credit card problems are not as bad, but there are few people who fully understand all the fees and conditions that apply.

So, we need to make consumer financial products easier to understand and we ought to eliminate badly designed or excessively risky products. The tough part is to figure out how to do this while allowing useful financial innovations to go forward. It is going to be important not to be an over-protective parent that never lets their kid do anything. In particular, mortgage products for lower-income people could end up with so many restrictions that lenders are reluctant to make them available, which would make it difficult for lower-income people to buy a home and work their way up the ladder towards financial stability.

The agency needs to do two key things to succeed. One, keep firmly in mind that products with some risks may still be appropriate, if they are explained well enough that consumers can make an informed choice. America was not built by making only completely safe choices. Two, stay focused on true consumer protection rather than empire-building by trying to have a say in every financial product that has any conceivable connection with consumers.

Read the full Q&A at PBS’s The Business Desk »