Do Consumers Need Financial Protection?

Did it ever happen in our country that a business misrepresented its goods and services, that it double-billed what it sold, that it billed for something it did not sell, that it denied liability for a mistake, that it bribed a customer, that it offered a kickback for a favor, or that it made outright false statements?

When that occurred, unsuspecting or unsophisticated consumers may have been financially and materially harmed. Should not then a society under the rule of law make an effort to provide consumers with the correct information they need to make the informed financial decisions? Should prices not be clear up front, risks apparent, and all necessary information available and not be buried in pages of fine print? In a transparent market, consumers ought to be able to make comparisons among products. No business, moreover, should profit from unfair, deceptive, or abusive practices.

For over two years, for example, the Federal Reserve and the big financial institutions did not tell the American people which of them were so close to bankruptcy that by December 5, 2008, they required a federal bailout of $1.2 trillion. Neither did the bailed-out bankers reveal to what extent they faced financial shortfalls. Only recently did it become known that the bailed-out banks reaped roughly $13 billion of income by taking advantage of the Federal Reserve’s below-market interest rates.

As urgently needed relief to millions of American consumers, the U.S. House of Representatives passed the Dodd–Frank Wall Street Reform and Consumer Protection Act by a vote of 237 to 192 on June 30, 2010. The Senate passed it 60 to 39 two weeks later, and President Obama signed it on July 21, 2010.

On that day the federal Consumer Financial Protection Bureau (CFPB) began operation. It had been set up by Harvard law professor Elizabeth Warren, who had long fought for a watchdog agency designed to "make basic financial practices, such as taking out a mortgage or loan, more clear and transparent while ferreting out unfair lending practices.

While liberals and consumer advocates wanted Obama to nominate Warren as the agency's permanent director, she was strongly opposed by financial institutions and by a majority of Republican Congressmen who saw no need to provide consumers with more transparency and more protection from abusive business practices. A statement by the Cadence Bank of Mississippi was typical of the arguments against any kind of consumer protection agency: “Compliance with current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.”

When in July Obama nominated former Ohio Attorney General Richard Cordray as the Bureau's director, a Republican filibuster in the Senate blocked his appointment, not in opposition to Cordray but in opposition to consumer protection. On January 4, however, while Congress was in recess, the President felt free to install Cordray as the Bureau’s director through the end of 2013.

According to the agency’s webpage, "The central mission of the Consumer Financial Protection Bureau is to make markets for consumer financial products and services work for Americans--whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products." Banks, credit unions, securities firms, payday lenders, student loan providers, mortgage-servicing operations, foreclosure relief services, and debt collectors fall under the bureau’s jurisdiction.

The new agency was designed to consolidate consumer service responsibilities from a number of other federal regulatory bodies, including the Federal Reserve, the Federal Trade Commission, the Federal Deposit Insurance Corporation, and even the Department of Housing and Urban Development. The Bureau will be an independent unit funded by, and located inside, the Federal Reserve. Its functions are to include rule-making and enforcement for consumer protection laws; prosecute unfair or deceptive business practices; deal with consumer complaints; promote financial education; research consumer behavior; monitor financial markets for new risks to consumers; and enforce laws that outlaw discrimination in consumer finance.

Today consumer protection is a feature of democratic government in most advanced societies. Yet, on Capitol Hill and in some of our media, the opposition to a federal consumer protection agency is still fierce. Read, for example, the column entitled “Super-czar on the loose” in the January 9 issue of the Journal-Courier. It was written by the inimitable Michelle Malkin whose educational qualifications are capped by a bachelor’s degree in English from Oberlin College.