Rep. Keith Ellison: A financial safety net for the rest of us

A proposed federal agency would have consumer protection in mind.

By KEITH ELLISON

Last update: October 18, 2009 - 5:19 PM

As the financial tsunami of 2008-09 hit titans like Merrill Lynch, Lehman Brothers and Bear Stearns, millions of middle-class Americans were dragged out in the tide with no bailout. For these folks, the American dream of home ownership, and borrowing generally, washed up on the shores of a financial disaster -- the most serious since the Great Depression.

One cause (there were many) was the failure of our system of consumer financial protection. No one was there to review transactions or protect consumers. The proposed Consumer Financial Protection Agency provides the lifeline that consumers need.

The most abusive and predatory lenders were not federally regulated. More than 50 percent of the subprime mortgage loans made in 2005 and 2006 were originated by lenders not subject to federal supervision. Mortgage brokers, finance companies and payday lenders made toxic home and consumer loans with few limits -- loans with little or no documentation -- commonly known as "liar loans."

It was not just a matter of lax regulation. Too often, the hand of regulation was invisible, at least when it came to consumer protection. The Federal Reserve, which has the primary rulemaking authority with respect to consumer financial protection, was embarrassingly late to the party. The Fed never exercised its powers to stop abusive practices in the mortgage lending and credit card industries. In addition, the supervision of regulated banks and thrifts was lax and gave insufficient consideration to consumer protection. Regulated institutions were able to evade even oversight by gravitating to the weakest regulator or by using nonbank affiliates to push questionable products.

Of course, it is now clear how this regulatory failure injured consumers and hurt community banks and other institutions that acted responsibly. The worst actors will always exploit a system with countless loopholes. This inevitably leads to a race to the bottom, as other institutions face ever-growing competitive pressure to relax underwriting standards and engage in risky practices. This race to the bottom eroded the market share, undermined the business model of responsible players, and jeopardized the safety and soundness of the entire financial system.

The answer to this acute problem is not to glue together the fragments of a broken system. Instead, we need an entire overhaul -- a brand new agency with consumer protection as its sole mission. That is why I support President Obama's proposal to create a Consumer Financial Protection Agency, or CFPA. Such an agency would strengthen regulatory standards and subject all institutions engaged in consumer credit transactions to the same rules and supervision. The proposed agency would not simply protect consumers; it would also help community banks and other responsible actors by relieving them of duplicative regulatory burdens and perverse competitive pressures.

Consolidating rulemaking and supervisory authority into one agency would help create a more efficient and rational regulatory system. A financial institution may currently be subject to consumer protection regulation from several different agencies, whose authority is based upon myriad statutes. A single consumer financial protection agency would have the power to streamline and simplify those regulations, thus reducing the compliance cost for community banks and other institutions.

In addition, by subjecting nonbank lenders to federal regulations and supervision, the CFPA would level the playing field between banks and nonbanks (not to mention between large banks and small ones). The CFPA would have the flexibility to go further by subjecting firms engaging in risky practices to more enhanced supervision. Hence, the CFPA could devote more of its resources toward scrutinizing nonbank lenders making "no-doc" option adjustable-rate mortgages (ARMs) instead of community banks making conventional, 30-year, fixed-rate mortgages.

When stronger consumer protection is proposed, irresponsible lenders will repeat the same dubious arguments. They will claim that there is a tradeoff between stronger consumer protection and higher costs on banks and other regulated institutions. But this is a false choice. A Consumer Financial Protection Agency that looks after the interests of consumers will also benefit responsible lenders and safeguard the safety and soundness of our financial system.

Keith Ellison, a Democrat, represents Minnesota's Fifth District in the U.S. House and is a member of the Financial Services committee.

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