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Con: Agency would limit credit and prevent consumer revival of the economy

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Thomas J. Donohue
January 30, 2010
EDITOR’S NOTE: The writer is addressing the question, Should Congress create a Consumer Financial Protection Agency?

With health-care reform suddenly relegated to the backburner, Senate leaders are preparing to move swiftly on a lesser known, but potentially dangerous piece of legislation that’s been lurking in the shadows.


The Consumer Financial Protection Agency, which passed the House late last year, would create a massive new federal agency that could further limit the availability of credit and impose new economic costs on our nation.


While everyone agrees enhancing consumer protection is an important goal, the U.S. Chamber of Commerce believes there’s a right way to do it and a wrong way.


The right way is to use common sense to fix what’s broken—filling regulatory gaps, ensuring that consumers have access to plain English disclosures about the risks of financial products, and making sure coordinated regulators are pursuing tough-as-nails enforcement against fraudulent and predatory practices.


The wrong way is to add another bureaucracy on top of the seven federal agencies that already protect consumers, especially when that new bureaucracy would burden virtually every business that extends credit to consumers with new costs.


Here are four major problems with the proposed CFPA:


—One, the agency’s authority would be truly expansive, extending far beyond traditional financial services products to a vast segment of the economy, overseeing businesses that have little to do with consumer finance. Everything from advertisers, utilities, lawyers, educational institutions and technology companies could be subject to new regulations simply because of the way they bill customers or because they’re vendors to financial firms that offer consumer products.


—Second, the CFPA could restrict access to credit and limit consumer choice at a time when both are essential for revitalizing our economy, creating jobs and getting families back on their feet. Its vague regulatory standards would make it harder for businesses to comply with new regulations. Incredibly, products could be deemed illegal after they’re already in the marketplace even if there were no rules on the books prohibiting them. Taken together with the draconian penalties for guessing wrong about the meaning of vague standards, financial institutions would be forced to either stop offering products or offer only the “plain vanilla” products that reduce choices available to consumers today. The resulting new bureaucracy likely would choke off credit to families and small businesses. Banks would be less likely to extend credit in communities, and those able to secure credit would see their borrowing costs increase.


—Third, the CFPA would further complicate an already byzantine set of regulations—setting a floor, not a ceiling, for state consumer protection laws. Rather than a uniform national standard that would eliminate the potential for harmful or deceptive products to slip through the cracks, there would be the CFPA and 50 state regulators—each with their own set of rules and interpretations of the CFPA. Companies and their customers would be lost in a maze of confusing and overlapping edicts. State attorneys general would be allowed to sub-contract their responsibilities to their allies and campaign contributors in the plaintiffs’ bar.


—Fourth, the CFPA would undermine the safety and soundness of our banking institutions by separating regulation of financial products from regulation of the financial institutions themselves. That approach is not just duplicative and inefficient; it will hamstring the ability of regulators to comprehensively monitor our financial institutions to ensure they are healthy, safe and sound.


Consumers and lawmakers would be wise to follow the physician’s rule when deciding how to “fix” consumer protection laws—first, do no harm. The CFPA, if enacted, would bring economic harm to consumers and to our economy without ensuring new protections or solving legitimate shortcomings in our financial system.


Congress and the Obama administration should scrap this proposal and go back to the drawing board.


Thomas J. Donohue is president and CEO of the U.S. Chamber of Commerce. Readers may write him at USCOC, 1615 H Street NW, Washington D.C. 20062-2000; Web site: www.uschamber.com.

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