Why consumers need a financial protection agency

Like a lot of young Americans, Bryan Howard took out a credit card and opened a money market account when he went off to college. His family blessed the idea; they thought it would help establish his financial independence.

Within just a few months, though, the Georgia student had racked up nearly $400 in fees — despite paying his minimum payment, on time, every month.
Bryan’s lender imposed an array of exotic charges. All were spelled out in his contract’s fine print, so he had no recourse.

{mosads}Sadly, this kind of story — Bryan’s was brought to light by ABC News — is common. Every year, credit card companies charge over $20 billion in penalty fees alone.

Fortunately, lawmakers recently took a bold step to stop such practices. And additional protection for consumers may be coming.

The House Financial Services Committee recently voted in favor of creating a Consumer Financial Protection Agency (CFPA). The measure will be voted on by the full House this month.

A similar agency was recently proposed in the Senate by Banking Committee Chairman Chris Dodd (D-Conn.).

The CFPA would be charged with creating and enforcing uniform consumer protections on all financial products, including credit cards, mortgages, payday loans, and deposit and checking accounts. Essentially, it would establish clear rules of the road to prevent responsible consumers from being captured in a web of unfair practices.

Just as the Food and Drug Administration enforces labeling laws and issues safety standards, the CFPA would enforce disclosure standards and certify that loans and charge cards are generally safe to use.

Currently, regulations on financial products are inconsistent and fragmented. Mortgage brokers, for instance, are overseen by multiple government agencies with overlapping authority. Other financial service providers aren’t regulated at all at the federal level.

Companies have been allowed to tempt customers with marketing gimmicks that hide a product’s true costs. And contract terms are often so complicated and technical that the average person simply can’t understand them.

The economic crisis is partially the result of these regulatory deficiencies. For subprime mortgages, for example, there were no quality controls in place.

This left millions of customers to fend for themselves, causing many to get buried by loans they didn’t understand and couldn’t afford. One of the CFPA’s many charges would be to monitor the mortgage industry.

Roughly half of the high-cost mortgages at the heart of the financial crisis were issued to middle-class families. Many came with opaque terms imposing huge fees and penalties.

The current regulatory framework for mortgages is a costly and confusing mishmash. For instance, every mortgage requires two different disclosure forms from two separate agencies.

The CFPA would enforce fair terms in the mortgage market, and require brokers to provide transparent terms that help customers avoid penalties and climbing rates.

A second critical role for the CFPA would be enforcing the robust credit card consumer protections just passed by Congress.
This was an important bill. Nearly 90 percent of American families have a credit card, and almost half of those folks carry a balance.

In May, Congress passed a measure prohibiting card issuers from predatory practices like shortening bill cycles to under 21 days, raising interest rates on existing balances without proper notification, and upping rates because a customer missed a card payment with another provider.

Although this bill took effect in August, a just-released study from the Pew Charitable Trust found that fully 100 percent of credit cards available online from the country’s leading issuers don’t comply with the new federal standards. Pew also found that credit card interest rates have been skyrocketing recently. During the first half of 2009, they went up by 20 percent, on average.

The CFPA could enforce the law and make sure consumers are protected.

Some critics complain that the CFPA’s rules would squash innovation in the financial services industry. This is nonsense. The agency would simply be tasked with establishing a minimum standard for quality and enforcing disclosure rules that make financial products understandable and free of hidden toxicity. The CFPA’s sole responsibility would be ensuring a basic standard of fairness. Companies would still be free to create new and better products.

Other naysayers protest that a new agency would create an unnecessary financial burden on financial firms and other institutions. This view is shortsighted, as the CFPA is intended to streamline the process and abolish inefficient, redundant and costly existing regulations.

{mosads}At ING Direct, we’ve voluntarily operated as champions of consumer protections for about a decade. Doing so has encouraged financially responsible behavior among our customers. And we’ve had no problem coming up with new products.

There is, of course, a chance that the CFPA’s regulations would prevent some low-income Americans from accessing bad credit. That’s a good thing. Vulnerable consumers shouldn’t be destroying their financial futures by taking on bad debt, and banks shouldn’t be compromising their institutional solvency by taking on too many high-risk loans.

The financial crisis was driven by millions of Americans getting overwhelmed with toxic financial products. The CFPA could help prevent history from repeating itself. Designed and implemented responsibly, this agency would be a positive addition to customers and the industry.

Kuhlmann is chairman and president of ING Direct USA.