The proposal includes examples of how this authority might be used. These include restricting or banning mandatory arbitration clauses in contracts with consumers; banning payments made by lenders to mortgage brokers; imposing a "duty of care" or a "duty of best execution" on financial intermediaries; banning prepayment penalties on certain types of mortgages; and requiring that loan providers offer "plain vanilla" products alongside whatever other approved products they want to offer.
(Note: The proposal for a "plain vanilla" mortgage is poorly explained and has been widely misinterpreted. It refers not to a type of mortgage but to a method of pricing, which can apply to any mortgage. A "plain vanilla" mortgage is a no-cost mortgage, where the only price to the borrower is the interest rate. The lender absorbs all third-party charges as well as his own. The advantage to the borrower is that no-cost mortgages are relatively easy to shop. Since many if not most mortgage lenders offer a no-cost option now, the challenge to CFPA would be to make them more prominent.)
I believe that creating accountability for consumer protection is essential, but I would have preferred to see the initial powers granted to CFPA limited to mandatory disclosures. A first-rate disclosure system based on modern technology and the insights of behavioral science, unshackled from the grotesqueries of past efforts, can take consumer protection a long way. In the future, as the limitations of disclosure became clear, the agency could request the additional powers needed to deal with the problems that remained.
The proposed wide-ranging grant of powers to CFPA makes me nervous. To be sure, the proposal is not to require CFPA to take any of the drastic measures cited above, but to give it the authority to do so if it decided that less intrusive measures would not work. The trouble is that it is far easier to, e.g., ban prepayment penalties than to find creative ways to disclose penalties so that they become a useful option to borrowers. Nowhere in the proposal is CFPA put on notice that options are generally good for consumers, and that the agency should impose a rigorous burden of proof on itself before taking one off the table.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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