Treasury aide defends Consumer Financial Protection Agency against bankers’ opposition

Bankers should welcome the government’s proposed Consumer Financial Protection Agency because it will level the playing field for financial products by submitting non-banks to the same regulation as banks, a top Treasury official said.

Deputy Treasury Secretary Neal Wolin defended the proposed agency before an audience at the American Bankers Association, the powerful industry group which has vowed to oppose it.

Wolin said that non-banks have had an advantage with some products because they were not subject to standards imposed by regulators.

“Banks with straightforward credit products were forced to compete with less scrupulous providers outside the banking system,” Wolin said. “Banks that were not willing to lower their standards lost market share and revenue.”

{For full text of Wolin's speech, click here}

The CFPA would fix this problem, he said, by extending federal oversight to all financial firms, including mortgage brokers and large independent mortgage companies, consumer credit companies and pay-day loan operations.

Wolin firmly rejected the argument made by American Bankers Association chief executive Ed Yingling in recent congressional testimony that responsibility for consumer protection should not be separated from the responsibility for safety and soundness.

“That argument simply does not hold water,” he said.

The industry has argued that prudential regulators are careful to preserve a profit margin on financial products, to keep financial institutions sound. But Wolin said the administration rejected the notion that profits based on unfair practices can ever be considered sound.

“They may produce short term profits, but they lead to long term losses and – most importantly – a loss of trust,” the Treasury official said. “Mortgages and credit cards are cases in point.”

The government proposal calls for a flow of information between the CFPA and other regulators through the exchange of examination reports. A framework can be put in place for swift resolution of any possible conflicts between the consumer agency and the prudential regulators, Wolin suggested.

The Treasury official also rejected the industry criticism that a consumer protection agency will stifle innovation. Smarter regulation will preserve innovation while protecting consumers from unwanted products they can’t understand, he said.

“We reject the false choice between consumer protection and innovation,” Wolin said. “We should have a financial system that both fosters innovation and provides strong consumer protections.”