A First Scary Look at the Consumer Financial Protection Agency

The Treasury has sent its proposal for a Consumer Financial Protection Agency to Capitol Hill. The breadth of this law is staggering to say the least.

Here is a summary from the WSJ:

According to the draft legislation, Treasury’s plan would:

1) Give the agency broad authority to write rules about services or products including:

a. Deposit-taking activities
b. Extending credit and servicing loans (this could include mortgages, credit cards, etc.)
c. Check-guaranty services
d. Collecting, providing, or analyzing consumer report information
e. Providing real estate settlement services, including title insurance
f. Leasing personal or real property
g. Investment advisers that aren’t already regulated by the CFTC or SEC
h. Processing financial data
i. Sale or issuance of stored value cards
j. Acting as a money service business
k. And any other activity the agency defines as a rule, except for most types of insurance, which are exempt.

2) Give the agency five board members, four of whom would be appointed by the President and confirmed by the Senate and the fifth would be the head of the regulator overseeing national banks.

3) Appropriate money to run the agency while also allowing the agency to collect annual fees or assessments from companies it supervises. The bill would also establish a victim’s relief fund for penalties collected by the agency.

4) The agency’s objectives would be to make sure consumers can make informed decisions about financial products and services, protect them from abuse, make sure markets operate fairly and efficiently, and ensure that all consumers have access to financial services.

5) Permit the new agency to prohibit or place conditions on mandatory pre-dispute arbitration agreements between consumers and firms such as credit card companies “if doing so is in the public interest and for the protection of consumers.”

6) Ensure that any rule adopted by the new agency would new preempt state law “if State law provides greater protection for consumers.”

7) Allow state attorneys general would be allowed to bring law suits for violations of new federal rules.

8) Allow the new agency to file subpoenas to collect information for the companies they oversee.

This would seem to gainsay the statements of President Obama that he has no desire to run American business. From a first reading, this is command and control legislation of the highest order.

I’m just kind of taking it all in at this point in time and there’s no reason to start hyperventilating until something more concrete rolls out but the potential for massive control and reorganization of the financial sector is embedded in this proposal.

Just for kicks, let’s look at a couple of the areas for which the new agency will be able to write rules. For example in 1b above, they will be expected to write rules about extending credit and servicing loans. Will they dictate the parameters under which consumer loans are going to be underwritten? Will Fannie and Freddie have to clear or coordinate their mortgage underwriting guidelines with the agency?

Skip down to 1f, there they seem to be given carte blanche to regulate leasing of real and personal property. Concentrate on a narrow sliver here — leasing an apartment or single family home. Currently each state has its own set of very extensive statutes that govern the leasing of real estate. Those statutes spell out everything from lease applications, the size of deposits to evicting a delinquent tenant. Does all of that get thrown up in the air and a new national standard imposed?

I wasn’t prepared for something this broad. Naively, perhaps, I assumed we would see something that plucked existing consumer protection responsibilities from different agencies and concentrated it in the CFPA. Instead we seem to have been presented with an outline for a super agency that would have vast power to reorganize a large swath of American business. All controlled by five politically appointees.

This would seem to gainsay the statements of President Obama that he has no desire to run American business. From a first reading, this is command and control legislation of the highest order.

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