Consumer Protection and the Financial Crisis: An Indepth Look at the Proposed Consumer Financial Protection Agency Act of 2009

This September 14^th issue of Lombard Street comes a day before the one-year anniversary of the collapse of Lehman Brothers. Rightly or not that event is often used to mark the start of the global financial crisis that had central bankers scurrying to come up with quick solutions to prevent a meltdown of the financial system. With the deepening crisis came calls for reform of financial regulatory institutions which were widely seen to have failed to avert the crisis and slow to deal with it effectively. The Obama Administration’s Financial Regulatory Reform: A New Foundation which was released in mid-June 2009 has proposed many changes in U.S. regulation in response.

A sweeping overhaul of consumer financial regulation is one of the central underpinnings of the Administration’s plan. The Administration’s report proposed consolidating most enforcement of federal consumer protection in a new agency that would assume responsibility for regulating most existing consumer protection laws and have additional powers as well. A month later the Administration presented Congress with the “Consumer Financial Protection Agency Act of 2009 to create this agency and make other modifications to consumer financial protection laws.

That legislation and the agency it would create is the subject of this issue. We begin with an article by Professor Oren Bar-Gill who teaches at the law school at New York University. He makes the case for the CFPA Act and responds to many of the criticisms that have been leveled so far. He concludes that the new agency could enhance consumer protection even if some of its more controversial aspects were eliminated. The CFPA Act envisions a stronger role for the states than is provided by current laws. Commissioner Sarah Bloom Raskin from the Maryland Department of Financial Regulation endorses that approach. She argues that the states are closer to consumer protection problems and can identify and react to these problems more quickly than federal regulators. She sees value in the CFPA Act making federal regulation a floor rather than a ceiling for the states. The CFPA Act strips the Federal Trade Commission of much of its role in consumer financial protection and would move staff that work on these issues from the FTC, along with the federal banking regulators that enforce consumer protection laws, over to the new CFPA. FTC Commission William Kovacic, who was the past FTC Chairman, makes the case for why that is a bad idea. He argues that the FTC has been a leader in enforcing consumer protection laws and has benefited from having special capabilities in economics. He also expresses concern that the CFPA Act would interfere with the FTC’s other consumer protection functions since the Act gives the new agency wide latitude to interpret many activities as involving consumer financial services and taking authority over them. Confusion and jurisdictional disputes would result. Lastly, Professors Joshua Wright and Todd Zwyicki of George Mason University conclude that the CFPA Act has no merits. They dispute that failed consumer financial protection contributed to the financial crisis, argue that the CFPA would reduce credit availability to consumers, and express concern that the CFPA would risk “expensive and wasteful regulatory overlap at both the federal and state levels”.

This issue also begins a new occasional feature. FinReg21.com interviewed credit-card veteran Philip Tomlinson who heads TSYS which is one of the leading payment card processors in the world. Mr. Tomlinson offers his perspectives on what the financial crisis has meant for the payment card industry and how things look going forward.