Do We Need a Consumer Protection Agency?

Arguments for a Consumer Financial Protection Agency: Many households took out mortgages they could not afford, and then when housing prices fell, many of them were unable to refinance and faced foreclosure, leading to large-scale defaults on financial securities held by banks, and causing a wider-spread economic crisis. Further, some credit card companies and payday lenders used deceptive practices, charging high rates or unfair fees to customers.

The job of protecting the consumer seems to have fallen between the cracks, given that the banking regulators’ mission is the safety, stability and soundness of the financial institutions, not the consumers served by those institutions. For these reasons, an independent agency focused on consumers should reduce deceptive practices and the chances of another crisis.

Arguments against: Federal housing policy was a major contributor to the mortgage crisis because banks were encouraged to make unsound sub-prime loans to meet congressionally mandated affordable housing goals. Government was the cause of the problem and is not the solution.

There are already multiple federal agencies regulating the financial sector, so why do we need another? Consumers’ best protection is a competitive market where they can choose another mortgage or credit card company if they do not like the one they have.

My bottom line: A consumer protection agency won’t be perfect, but it will help, especially in situations where consumers have been presented with inadequate or confusing information.

Because it will be difficult to get legislation through Congress to create a separate new agency, it may be better set up an independent division within the existing regulators. Or, have an independent rule-making agency, but with the enforcement done through existing regulators. Federal housing policy was part of the problem and should be reformed, but that does not weaken the case for better consumer protection.