Republicans Coddle Banks at Consumer Expense: Angela Littwin

The passage of the U.S. health-care legislation was an unqualified political and substantive victory for progressives, even though the final product was weaker than many of them had hoped. If a similar fate awaits the proposed Consumer Financial Protection Agency, it will be a disaster.

The history of health-care laws has been that they are almost impossible to pass, but that once in place, they get better over time. The history of consumer financial regulation is the exact opposite. The books are filled with laws that look effective at first glance, but that have been undermined by government-agency inaction, strategic manipulation by financial institutions, and loopholes large enough to swallow a big bank.

In the years before the crisis, Congress addressed identity theft, transparency in credit reporting, access to credit reports, and credit-card disclosures. But these laws didn’t prevent the recklessness that led to the financial meltdown.

Even the Credit CARD Act that went into effect in February will have a minimal impact on consumers’ bottom lines. Banks are already rewriting their credit-card contracts to include a brand-new set of confusing terms and conditions that will leave plenty of consumers paying through the nose. The banks can always move faster than Congress.

Low Priority

While agencies are far better suited than Congress at keeping up, current financial regulators view consumer protection as a low priority, to put it mildly. For example, few people know that the Federal Reserve has had the authority to regulate abusive mortgages since 1994. It didn’t use this power until July 2008. The Office of the Comptroller of the Currency, another financial regulatory body, has intervened on the banks’ behalf in several lawsuits over state consumer-protection law.

The Office of Thrift Supervision is an even more enthusiastic advocate for the financial institutions it regulates. In 2006, the OTS successfully lobbied Countrywide Financial Corp. to switch regulators, thus allowing the company to carry on its disastrous mortgage practices with even less real scrutiny than it got at the OCC.

So long as Congress keeps allowing institutions to shop around for the regulator that regulates least -- rather than applying across-the-board rules for each product type regardless of who issues it -- there will be no agency that provides real accountability over the consumer practices of the big banks. The agencies that do have consumer protection authority will continue to chip away at rules in order to attract institutions to regulate and preserve the fees that come with them.

Consumers as Constituents

That is why a strong Consumer Financial Protection Agency is crucial. We need an agency that sees consumers, not banks, as its constituents. It also needs enough power to prevent financial institutions from leaving its jurisdiction in search of fairer regulatory pastures.

The amendments proposed by Senate Republicans would fail to accomplish these goals. The details have varied from bill to bill, but the ideas remain the same.

The GOP wants to put the agency under the thumb of existing regulators who have already shown how seriously they take consumer protection. And the Republicans want to dilute the agency’s mission to protect consumers with an obligation not to interfere with bank “safety and soundness,” a phrase that has been manipulated by Wall Street and its allies to exclude meaningful reform.

Good Sense

Fortunately, the Senate has rejected these proposals so far. But the GOP and Wall Street lobbyists will keep trying. Senate Democrats must ensure that good sense prevails.

If the Republicans successfully dilute the power of the consumer financial protection body in this way, we will end up with more of what we have always had: regulators who lack either the appetite or the authority for reining in the risky lending practices that got us into the current financial crisis.

A weak Consumer Financial Protection Agency will be worse than none at all. Legislators will go home able to tell their constituents that they took on Wall Street. The midterm elections will come and go. But little will change in the lives of ordinary people.

With Wall Street reform, the devil is in the details. Republican amendments would need to change only a few of those details for the Consumer Financial Protection Agency legislation to become another toothless law, worsening over time and sitting unused on the books.

(Angela Littwin is an assistant professor at the University of Texas School of Law. The opinions expressed are her own.)

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To contact the writer of this column: Angela Littwin at alittwin@law.utexas.edu