As the House begins its Floor debate this week on financial regulatory reform, it is clear that the time is ripe for action. In particular, the case for better consumer protection is clear: one cause of the financial crisis is that families took on mortgage or other debt obligations that they did not understand and they are now defaulting on the loans. One measure to address improved protection is a new Consumer Financial Protection Agency (CFPA). If enacted, this new agency will have to balance the vital task of protecting the interests of consumers against the danger of a cumbersome regulatory framework that is too costly and that reduces options for consumers and small businesses.
In other consumer protection measures, Congress has usually acted to pre-empt state laws, so that businesses meet one federal standard and do not have to satisfy regulations that vary from state to state. For example, the recent standards for lead in toys pre-empted state laws. There are good reasons for national standards: they means that consumers are helped by a uniform set of rules if they move from one state to another. If credit card companies, for example, had to explain different rules in each state, this would add unneeded complexity when the goal is to create greater transparency and ease of understanding. And most people learn by experience, so that uniform rules would allow consumers to know that the protections they had become used to in one state would be the same in a new state.