Among the Obama administration’s proposals for Financial Regulatory Reform (FRR) is one for a new Consumer Financial Protection Agency (CFPA). It is designed to replace the existing system of consumer protection where authority is fragmented among different federal agencies plus 50 states, where some nondepository firms are regulated loosely or not at all, and where regulators generally give higher priority to protecting the solvency of financial firms than to protecting consumers.
I have a strong predisposition favoring this proposal because I view it as the best and perhaps the only way to make mortgage disclosures useful to borrowers. The major shortcoming of existing mortgage disclosure rules is that critical information that borrowers could use often is not disclosed, and when it is disclosed, it tends to gets lost in a torrent of garbage disclosures. Borrowers are swamped with information they cannot use.
The proposal for a CFPA addresses most of the major causes of garbage disclosures and information overload. A critical one is divided responsibility, where no one agency has authority over the totality of disclosures. Divided responsibility encourages disclosure overload, as well as inconsistencies between disclosures mandated by different agencies. These problems would be eliminated by investing sole responsibility in CFPA.
A second problem has been that the disclosures mandated by existing agencies, which are burdened with other more pressing responsibilities, are not kept abreast of market developments, and are seldom tested to determine effectiveness. These would be required duties of CFPA for which it would be held accountable.
A critical problem that is not addressed is that most of the existing garbage disclosures are embedded in the law. While the CFPA would have "sole authority to promulgate and interpret regulations under existing … statutes, such as the Truth in Lending (TIL)…," the disclosure requirements in TIL are very explicit and can’t be interpreted away. For example, TIL states that mortgage lenders must disclose the total of payments over the life of the loan, and the amount financed, which is the loan amount less upfront lender charges. Both these disclosures are worse than useless, because they waste space and divert borrower attention. Unless CFPA can get out from under this type of legislated garbage, it will be extremely difficult to improve mortgage disclosures.
The authority of CFPA would extend to all financial products offered to consumers, not just mortgages, and its powers would not be limited to mandating disclosures. CFPA would also have "authority to regulate unfair, deceptive or abusive acts or practices," and it would have the supervisory, examination and enforcement powers required for the purpose. These include the right to "place tailored restrictions on product terms and provider practices." This grant of widespread powers is what has made the financial community apoplectic about CFPA. …CONTINUED