Proposed agency for consumer protection faces fierce debate

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 Levitan 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."

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