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A Consumer Financial Protection Agency Sounds Like a Great Idea — But How Strong Will It Be?

One of the ideas for financial regulatory reform that President Barack Obama will outline today is the creation of a new Consumer Financial Protection Agency, modeled after a proposal from Troubled Asset Relief Program watchdog Elizabeth Warren for a Financial Products Safety Comission. As The Washington Post explains, this would be a new federal agency to regulate mortgages, credit cards, and other kinds of lending, requiring clearer disclosure to consumers.

The idea has picked up steam in recent months. But the Obama administration proposal offers new details of exactly how it might work, including tackling one of the most vexing consumer problems: figuring out exactly what’s in all that paperwork at real estate closings.

The agency would have broad authority to overhaul a tangled mess of federal regulations, such as the various laws that compel lenders to give mortgage borrowers a massive stack of paperwork at closing that includes several calculations of the true cost of the loan itself.

Another idea: Making it standard practice to offer consumers a 30-year, fixed rate loan — the normal, plain vanilla mortgage. If the borrower wanted a more exotic product, such as an adjustable rate loan, they would have to opt out, signing a waiver saying they were deliberately choosing a non-standard loan.

Based on the leaked draft of the administration’s proposal obtained by The Post, all this must sound great to consumer activists, who have been pushing for more consumer protections for years. But not so fast.

While the idea sounds great on paper, the agency’s effectiveness will be determined by how much power it truly gets. Lobbyists and special interest groups will likely work hard to limit the scope of its authority. And its structure will be crucial, as well — for example, will it have the ability to approve or prohibit products before they hit the market, or will the agency have more limited recall authority, once products are on the market and run into trouble?

How much funding will the agency get? How strong will its political support be? Who will be appointed to the agency — and what interests will they represent?

These are all legitimate questions. Yes, it’s encouraging to consumer advocates to finally see a proposal like this get administration backing. But it’s only beginning. There’s still a long and difficult road ahead before such an agency becomes a reality. And even then, whether such an agency makes a difference to consumers or not will depend in great measure on just how much power Congress and the administration grant it so that it can truly protect consumers.

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