Retired social worker Gloria Gray cut up her Capital One credit card in October and paid off the $500 balance. So she was surprised when Capital One sent her a $66 bill a few weeks later. She decided to pay, just in case. But the bills kept coming, bigger and bigger, month after month.
"I didn't owe them," says Gray, 76, of Charleston, W.Va. "I kept writing them letters. I would write on the bill: 'I have paid you. I do not have an account with you.' "
Frustrated, she took her case to the West Virginia state attorney general's office, which had received hundreds of similar complaints about Capital One. But the state attorneys were powerless. A court last year had ordered them to stop pursuing allegations of "unfair or deceptive practices" after Capital One swapped its state banking charter for a federal charter and became a national bank. Under the patchwork regulatory scheme covering the U.S. financial services, state attorneys no longer had jurisdiction over Capital One.
The Obama administration thinks it has a solution for consumers like Gray, who struggle to find someone to pursue their complaints against banks, credit card issuers, mortgage brokers and other financial firms. As part of a massive overhaul of the financial regulatory system, the administration wants to create an independent agency to police the financial marketplace on behalf of consumers.
The proposed Consumer Financial Protection Agency (CFPA), which faces fierce resistance from the banking industry and Wall Street, would have power to:
•Write a consistent set of rules to protect consumers from abusive practices.
•Examine financial institutions to ensure they comply with consumer laws and regulations.
•Enforce the law, sometimes seeking civil penalties for a victims' relief fund.
Assuming power and personnel from bank regulators, the agency would cover everything from mortgages to savings accounts to PayPal. Its reach would extend to non-bank payday lenders and mortgage brokers that have gone largely unregulated. States would still regulate insurance. The Securities and Exchange Commission would still oversee financial markets.
"It can change the financial marketplace," says Michael Barr, assistant Treasury secretary for financial institutions. "The system had nobody to look out for consumers across the board."
Under the plan, states could enforce even stricter financial regulations if they wanted to.
50 different state standards?
Opponents say the agency proposal would just create another layer of red tape, unnecessarily divide consumer regulators from regulators assigned to keep banks from taking on too much risk, smother innovative financial products and create uncertainty by exposing banks to 50 different state standards.
"We want to protect consumers. The CFPA doesn't accomplish that goal," says Scott Talbott, lobbyist for the Financial Services Roundtable, which represents big financial companies such as Citigroup, GMAC Financial and Capital One. "Each state could write its own laws. This will destroy uniformity, increase costs and confuse customers."
But supporters say the time is right for a financial version of the Consumer Product Safety Commission, which regulates everything from toys to toasters.
They say unscrupulous lenders and mortgage brokers steered families into high-cost subprime loans when most could have qualified for cheaper, conventional mortgages. Many didn't understand how expensive their mortgages would become after teaser rates expired. That, and a collapse in home prices, set off a wave of defaults that knocked the economy into a tailspin.
"We've gone through — and in many ways are still in — a traumatic financial and economic crisis," Treasury's Barr says. "Families are paying an enormous price for a lack of sound regulation. … Risks were allowed to build up in the system, and consumers were left exposed."
In a poll of 1,018 people out today, the Consumer Federation of America found that 57% support the new agency. Enthusiasm was highest among blacks (79% support), Hispanics (70%) and the poor (69%) — groups targeted by predatory lenders. "Americans want a cop on the beat to rein in these abuses," says Travis Plunkett, the consumer federation's legislative director.
He and other CFPA supporters say the current crisis exposed weaknesses in the U.S. regulatory framework:
•Responsibility for protecting consumers is fractured among different agencies. Unlike consumer products, food and pharmaceuticals, financial products are regulated based on the firms that offer them. It's as if General Electric refrigerators were regulated by one agency and Maytags by another. If you get a loan from a national bank, the Office of the Comptroller of the Currency is supposed to protect you from predatory practices. If you get a loan from a state bank, you may depend on your state regulators, the Federal Deposit Insurance Corp. or the Federal Reserve. "We don't regulate drugs based on the manufacturer," says Elizabeth Warren, a Harvard University law professor who first proposed the consumer financial protection agency in 2007. "We don't regulate baby car seats based on who makes them. Those products have to meet basic standards regardless of who issues them. The CFPA would do the same: one set of rules for each product."
True, a consumer-focused agency won't be perfect. Even the Consumer Product Safety Commission has come under fire for failing to protect consumers, as it did in the controversy over toxic toys and other imports from China.
•Bank regulatory agencies have other priorities. Making sure banks don't fail, for instance, can leave consumer protection "an orphan mission," writes Adam Levitin of the Georgetown University Law Center.
The Fed, for example, took 14 years to write rules on predatory mortgages after Congress gave it that authority and made a move only after the subprime meltdown. "The Federal Reserve could have done virtually everything this agency will do," says Warren, chairwoman of the congressional panel overseeing the government bailout fund. "It could have averted the crisis in mortgages, but it never acted. … Fed chairmen are selected for their expertise in monetary policy, things like M1 and the velocity of money. The Fed is not staffed with bad people. The problem is that their expertise and interest is monetary policy, not consumer financial products."
Similarly, the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC are chiefly responsible for making sure banks don't fail, not for protecting consumers. Suppose a bank kept changing the due date on its credit cards, causing some card holders to get confused, miss payments and get dinged with late fees. To a regulator responsible for a bank's health, Treasury's Barr says, "moving the due date around creates revenue for the bank — and that's a good thing."
Critics say it's a mistake to separate consumer regulation from safety-and-soundness regulation. If the new agency banned prepayment penalties on some loans, for example, lenders' financial stability would be more vulnerable to interest rate changes that encouraged consumers to pay off loans early, warns Peter Wallison at the conservative American Enterprise Institute.
•Banks can change regulators by switching charters. That can lead to a "race to the bottom" by regulators loosening rules to entice more banks to choose their jurisdiction.
Capital One Bank, based in McLean, Va., was fending off subpoenas by the West Virginia attorney general when it switched charters and became a national bank. Several months later, a judge ruled that the attorney general could not enforce subpoenas against a national bank, killing an investigation into whether Capital One was failing to give consumers credit they'd been promised, gouging them with high interest rates and fees, and saddling them with a "payment protection plan" that offered no real benefits. "It's the most galling case I've seen in 30 years in the law," says Charli Fulton, senior assistant West Virginia attorney general.
In an e-mail response to questions from USA TODAY, Capital One spokeswoman Tatiana Stead says the charter change had nothing to do with the West Virginia investigation.
After two acquisitions, Capital One's operations fell under four different charters and four regulators. It converted to a national bank "to give us operational efficiency and supervisory consistency," she said. "Capital One believes it has acted properly with respect to the marketing and servicing of its products and services and in providing appropriate disclosures to our customers."
Talbott of the Financial Services Roundtable dismisses concerns over charter changes as "a red herring. Can you show me a bank that has changed its charter more than once in five or 10 years?" The Government Accountability Office — Congress' investigative arm — found that less than 2% of the nation's banks changed between state and federal charters from 1990 to 2004.
The Federal Reserve, FDIC and the Comptroller of the Currency have joined the financial services industry to oppose the consumer agency. Fed Chairman Ben Bernanke told the Senate Banking Committee recently the Fed's "expertise in financial markets, payment systems and supervision positions us well to protect the interests of consumers."
But "no one cares" what the bank regulators think, says House Financial Services Committee Chairman Barney Frank, D-Mass., because they failed so badly in the run-up to the subprime disaster. Frank plans to begin serious work on the bill this month and to get it passed this year. "I am determined that it will pass," Frank says. "It's a test of my ability to provide leadership." The Senate Banking Committee plans to begin work on its version this month, too.
The big banks want responsibility for consumer protection to stay with the Federal Reserve. Smaller banks don't mind if the new agency gets rule-writing powers, but they want supervision and enforcement to remain with existing regulators. Then, says Steve Verdier, lobbyist for the Independent Community Bankers of America, the CFPA could focus on policing the non-bank lenders "that caused the problems in the first place by and large — the unregulated mortgage brokers and the check cashers."
Barr says compromise is inevitable. Even so, "We're going to have a big fight with the financial sector. … The country cannot afford to go back to the status quo."
"Of course the big lenders want to kill the CFPA," Warren says. "The agency will get rid of tricks-and-traps products. … Let's face it. This is a fight where all the money is on one side, and all the hurt is on the other."