September 21, 2009

MYTH #1 - The CFPA will provide a regulatory home for specialists who care about consumer protection.

• REALITY:  In a November 2008 University of Pennsylvania Law Review article, Professor Elizabeth Warren, the chief proponent and creator of the CFPA concept, indicated that the housing of the consumer protection staff is not important, but the function of the staff is vital. Professor Warren wrote, "The failure of current attempts at regulation of credit-product safety prompts us to propose the creation of a new federal regulator-a Financial Product Safety Commission or a new consumer credit division within an existing agency (the FRB or FTC)." Since the regulatory home of the consumer protection staff is not important, the taxpayers should not be burdened with the cost of creating another government agency.

MYTH #2 - The CFPA will reduce systemic risk.

• REALITY:  The creation of a CFPA would separate the regulation of protecting consumers from ensuring safety and soundness and therefore will increase systemic risk. Fannie Mae and Freddie Mac are examples of what happens when there is a bifurcated system of regulation. The Office of Federal Housing Enterprise Oversight regulated safety and soundness while the Department of Housing and Urban Development was the mission regulator with the authority to approve new housing mortgage products. In a July 8, 2009 interview with the American Banker, James Lockhart, Director of the Federal Housing Finance Agency speaking about the importance of safety and soundness and mission stated, "[A] separation of such responsibilities among GSE regulators helped cause their downfall...You can't really separate that."

MYTH #3 - According to CFPA proponents, "It is impossible to buy a toaster that has a one-in-five chance of bursting into flames. 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."

• REALITY:  Regardless of a consumer's understanding of the operations of small appliances, exploding toasters, even fully disclosed, are somewhat dangerous to everyone who decides to buy them. However, as Professor Todd Zywicki noted, "Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators)...And unlike toasters, borrowers have substantial say over whether their loan ‘explodes.'" In an elitist way, the Democrats agree. Their proposal allows those who they deem can "understand" their desired credit products to purchase them, regardless of the risk of "explosion."

MYTH #4 - The CFPA will level the playing field, but will not limit consumer choice.

• REALITY:  The CFPA would not level the playing field for consumers. In fact, it would make the playing field more lopsided. The CFPA would have the authority to designate certain financial products as standard "plain vanilla" to be offered to those individuals who do not "understand" the terms of the other products; thus, leaving only elites with the freedom to choose from among all financial products in the marketplace.

• REALTY:  It is impossible for a lender to determine the "understanding" of individuals without being exposed to an increased risk of litigation. Among other things, attorneys would probably advise clients to consider the level of education and occupation of the consumer, rather than character (e.g., credit history), ability to repay or consumer choice. According to the Department of Commerce, in 2005, white-Americans had a higher percentage of adults with at least a bachelor's degree (31 percent), than black-Americans (18 percent), American Indians/Alaska Natives (14 percent) followed by Hispanics (12 percent). Thus, the government's "protection" would mean that millions of minority consumers would not have the same privilege and freedom to purchase the desired credit products or obtain investment vehicles that others have.

MYTH #5 - The CFPA, watching out for families and individuals, can reduce the overall regulatory burden.

• REALITY:  The creation of the CFPA would increase the regulatory burden for firms that would be subject to a safety and soundness regulator or the Federal Trade Commission, new State consumer protection laws imposed by 50 State legislatures and enforced by 50 State Attorneys Generals, and new regulations promulgated by the CFPA. Ben Bernanke, Chairman of the Federal Reserve, expressing his concern about the creation of the CFPA stated, "There are many issues to consider, including that overly restrictive or burdensome regulations can lead to increases in product pricing or product withdrawals that would overly constrain credit, or in extreme cases, severely impact the availability of responsible credit for consumers."

MYTH #6 - The CFPA will foster innovation.

• REALITY:  The CFPA would drive innovation out of the market. No longer would institutions under the jurisdiction of the CFPA have an incentive to innovate to meet the needs of consumers. Rather, institutions would strive to meet the demands of the bureaucrats at the CFPA. The proposal has a safe harbor for only what it calls "plain vanilla products." The CFPA would determine what these products are and create standard guidelines for each product. According to John Bowman, acting director of the Office of Thrift Supervision, "[W]e are concerned that the new agency [CFPA] could operate in a manner that would limit business options and constrain financial services products and innovations."

MYTH #7 - The CFPA will be particularly beneficial for community banks and credit unions that will be able to divert fewer resources toward regulatory compliance and more toward customer service and innovation.

• REALITY:  In an August 18, 2009 letter to Secretary Geithner regarding the proposed creation of the CFPA, community bankers from across the country expressed opposition to the plan. The letter stated, "[T]he proposal would undermine our core business model - individualized products and services...The CFPA would raise our regulatory costs and burden...Community banks would be put at a disadvantage to larger banks."

MYTH #8 - Without a CFPA, financial institutions can shop around for the regulator that provides the most lax oversight.

• REALITY:  Charter choices and changes are made by firms to accommodate strategic decisions regarding bank powers, capital requirements, and lending limits. There is very little evidence that institutions shift charters-a cumbersome legal process-for consumer compliance reasons. Statistics on bank charter conversions from 2004-2008 show that out of approximately 8,000 national and State banks, there has been an average of only 35 charter conversions each year. Those that do switch do so for business powers and cost reasons. Moreover, banking regulators recently issued joint guidelines that they will not accept new charter applicants who are merely looking for lighter consumer regulation.

MYTH #9 - Regulators' budgets come from the institutions they regulate. This regulatory arbitrage has triggered a race to the bottom among prudential regulators and blocked real consumer protection.

• REALITY:  The majority of banks are regulated by the FDIC or the Federal Reserve. Banks regulated by the FDIC or the Fed pay no supervisory assessments to those agencies. The FDIC is funded by deposit insurance premiums paid by all banks, and the Fed is funded through its financial activities, including the interest earned on the Treasury securities and its open market activities. The OCC and OTS rely on supervisory assessments for their funding, but there is no evidence that their consumer compliance examinations are more lenient than those of the FDIC or the Fed.

• REALITY:  According to H.R. 3126, the CFPA will be funded initially by the taxpayers with "such sums as are necessary." After initial set up, language intends for the CFPA to be funded through assessments and fees. Simply put, the CFPA will be supported by the "institutions it regulates."

MYTH #10 - The CFPA would slice through the regulatory maze to create one consistent set of rules.

• REALITY:  The CFPA would add an additional layer of rules to the maze. The CFPA would play a major role in promulgating and interpreting consumer protection rules, but the CFPA will set the "floor" not a "ceiling" for States to follow. Allowing 50 States to set different standards will not simplify the regulatory maze, but it will undermine the duel-banking system.