New U.S. consumer agency can do some good but it could have been left to states

One of the beauties of the English language is that it is still owned and operated by amateurs. While advertising professionals provide many great and repeatable lines, the words and expressions with staying power most often seem to pop up of their own accord and fit so perfectly.

When someone says, “Don’t make a federal case out of it,” for example, we know they mean: Don’t inflate something simple into something incredibly complicated.

Officially, the origins of that expression are obscure, but we know how it was first popularized: on television. One of the wonderful folks who had been subpoenaed to testify at the 1950-51 Kefauver Committee’s televised hearings on organized crime used it to suggest to his interrogators that his activities were insignificant. Within hours, it seemed, the phrase became part of our everyday language.

While it is not always wise to take the advice of crime figures, there was some commonsense wisdom in his remark, which is why the expression had staying power. We should keep it in mind as we consider a new dimension added to the federal government’s control: consumer finance.

One of the responses to the Wall Street meltdown was passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Barack Obama signed into law in July 2010.

Included in that law was the creation of a new federal government agency, the Consumer Financial Protection Bureau (CFPB).

As is the case with many federal agencies the wording of the CFBP’s mission is better at generalities than specifics, especially when it comes to areas of responsibility shared with the existing federal regulatory apparatus. Finance, after all, is one of the oldest activities in the history of the U.S. Government and as we might expect, over the years the financial industry has acquired a Jurassic-sized tail of complex and often overlapping federal, state and local regulators, controllers and meddlers.

Enthusiasm for financial regulation at any level, from consumer to institutional, varied among these overlapping agencies and from time to time even within those agencies. This inconsistency has one benefit, if we can call it that: It allowed successive Congresses to write financial regulations that were ambitious in their goals but often imprecise or ambiguous in their details, with the result that the agencies involved had sort it all out later.

The CFBP is no exception to this pattern, but its responsibility is different. Unlike most of the other overlapping agencies, which had substantial industry responsibilities, the new federal bureau is concerned only with how individuals and households are affected by financial transactions and industry practices.

As a result, the CFBP is roaring down the regulatory tracks, proposing rules that would give it authority over credit reporting agencies and debt collectors, gathering data on student loans, investigating bank overdraft fees, and putting together a data-sharing system with the National Association of State Attorneys General.

There are several reasons why this is a good thing. The first is that past federal efforts in these areas have been erratic, feeble and generally unproductive. A second one is that the CFBP’s actions may end up clarifying who is responsible for regulating these areas. That would be very helpful to regulators and consumers alike.

When it comes to regulating banks, for example, we have been wandering in the swamps, fens and bogs of federal, state and local jurisdictions for many years. As soon as the CFBP attempts to translate the data it has gathered on bank fees into a set of do-and-don’t rules, its authority to do so is almost certain to be challenged, either by the banks themselves or by one or more of the existing regulatory agencies.

When the courts or the Congress end up sorting all that out, consumers with questions or complaints about financial transactions might gain some clarity and guidance, now sorely missing, as to which agency they can turn to for help.

With all of the potential good that CFBP might do, though, it still suffers from the general ailment of the Dodd-Frank legislation, which failed to address the important issues. Its banking provisions neglected to deal with either systemic risk or the root causes of the financial meltdown.

In the same way, its consumer provisions neglected to deal with the principal source of consumer financial losses in that meltdown. It was not the wording of mortgage loan agreements, for example, that bankrupted so many Americans. It was the government agencies acting in their own interests instead of the country’s.

Better consumer information is a good thing and most welcome. But there is little that the new CFBP does that could not have been achieved by empowering the existing state authorities. “Why make a federal case out of it?”

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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