One Adam J. Levitin (Georgetown University Law Center; Robert Zinman Resident Scholar at the American Bankruptcy Institute): Proposed Consumer Financial Protection Agency changes the architecture, but not the mandates of consumer protection laws
PLI: Can you give us a brief overview of the proposed Consumer Financial Protection Agency?
ADAM J. LEVITIN: The Obama administration has proposed restructuring
financial services regulation by transferring all consumer protection
functions from existing agencies to a new Consumer Financial Protection
Agency (CFPA). The goal of the CFPA legislation is to address the flaws
in the regulatory architecture that have inhibited effective responses
to the substantive problems, rather than mandate specific new
substantive consumer protection laws.
The current consumer financial protection is based on disclosure regime
and is policed through supervisory feedback, enforcement actions, and
occasionally prohibitions on terms, products, and practices that are
deemed inherently unfair and deceptive. On the federal level, consumer
protection in financial services is divided among a number of agencies:
the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC and
DOJ. Some of these agencies have the ability to promulgate regulations,
some also exercise supervisory authority over financial institutions,
and some may only enforce existing regulations. Sometimes authority is
over a class of institutions, and sometimes it is over a particular
type of product.
There are four main structural criticisms of the current regulatory
structure: that consumer protection is a so-called "orphan" mission;
that consumer protection conflicts with, and is subordinated to,
safety-and-soundness concerns; that no agency has developed an
expertise in consumer protection in financial services; and that
regulatory arbitrage of the current system fuels a regulatory
race-to-the-bottom.
Consolidation of consumer financial services protection authority
could: place all financial services companies, regardless of the form
of their charter, under a single regulator, thus ending its orphan
status; separate consumer protection from safety-and-soundness
regulation, thus ending subordination; encourage the development of a
deep bench of regulatory expertise and knowledge; and end the
opportunity for regulatory arbitrage and any potential race to the
bottom.
There are several potential concerns about a CFPA: conflicts with
prudential regulators; ambiguity with respect to Consumer Reinvestment
Act authority; and potential overregulation resulting in higher costs
of financial products, less product availability, and discouragement of
innovation. Still, there are compelling reasons to believe that the
present regulatory architecture cannot produce the optimal consumer
protection regime and will continue to fail in its task, resulting in
unfair treatment of consumers and a significant source of systemic
risk. To this extent, consideration of a CFPA should strive to
distinguish between the basic thrust of the legislation — a
consolidation of the regulatory authority of — and the proposed new
substantive powers granted to the agency.
| More from Professor Levitin — Download The Consumer Financial Protection Agency |
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