Fight the financial-industry thugs - MSN Money

Fight the financial-industry thugs

The bullies who nearly ruined the economy are now trying to kill a proposed agency that would protect US consumers. Don't let lawmakers sell you out again, folks.

[Related content: savings, consumer guide, interest rates, credit cards, Liz Pulliam Weston]
By Liz Pulliam Weston
MSN Money
Toxic financial products aren't dangerous just to those of us who borrow and invest. They can, and nearly did, blow up the whole economy.

Yet bankers, lenders and more than a few politicians are trying to convince us that sensible regulation of consumer financial products is somehow a bad idea.

What would the Consumer Financial Protection Agency do?

Ask yourself who is better qualified to judge risk: the person with a 620 credit score and a $10,000 credit limit or the financial conglomerate with thousands of extravagantly paid financial analysts, sophisticated scoring models and smooth-talking marketing departments that decided they could make money off him?

The latter are the people who engineered a system that entraps consumers and sets them up to fail. And they could win this battle, too. But you can fight back by taking 60 seconds to e-mail your lawmakers and let them know you won't be sold out again.

The financial industry is fighting the creation of a Consumer Financial Protection Agency that would be able to effectively regulate, among other things:

Home loans.

Credit cards.

Payday loans.

Stored-value cards such as gift cards.

Collection agencies.

Credit bureaus.

Financial advisory services.

The agency could write user-safety guidelines for financial products, ban deceptive practices and possibly rid us of those god-awful binding-arbitration clauses that force you to sign away your rights every time you open a bank account or apply for a credit card.

The financial powers that be, however, don't just dislike the idea of a powerful consumer advocate at the federal level. They loathe it.

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Lobbyists have already managed to carve car dealers away from the proposed agency's jurisdiction -- because car dealerships wouldn't deceive anybody, would they? -- and you can expect more attempts to gut or kill the agency entirely in weeks to come.

Financial-services companies would much prefer we stay with the current system, which is so ridiculous, arcane and fragmented that true consumer protection is the exception rather than the rule.

Video: Consumer Financial Protection Agency pros and cons

If you need just one small example, try to find out which regulator is in charge of each of the five bank branches nearest your home. If you need some help, know that the Federal Reserve regulates state-chartered banks that are part of the Federal Reserve System and that the Federal Deposit Insurance Corp. regulates state-chartered banks that aren't part of the Federal Reserve System.

The Office of Thrift Supervision monitors federal savings and loans and savings banks, while the Office of the Comptroller of the Currency oversees banks with "National" or "N.A." in their names -- Wells Fargo and Chase, for example. (Wells Fargo includes the "N.A." in tiny type at the bottom of its home page, while Chase doesn't bother.)

I've been covering banking off and on for more than 20 years, and I can still have a tough time figuring out to whom a reader can complain when his bank has screwed him over.

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Jurisdiction for consumer financial products is scattered over an array of federal agencies, none of which concentrates primarily on consumers and all of which delegate it to a backwater area of regulatory responsibility.

As one group of consumer law professors put it:

"Our review of the regulatory approaches at the existing agencies, whose jurisdiction includes but does not focus on consumer financial products, leads us to conclude that on balance they place a higher value on protecting the interest of financial product vendors who promote complex debt instruments using aggressive sales practices, than they do on protecting the interests of consumers in transparent, safe, and fair financial products."

Fight the financial-industry thugs
Continued from page 1

[Related content: savings, consumer guide, interest rates, credit cards, Liz Pulliam Weston]

Need some examples of how our current regulatory system has failed? Unfortunately, there are many:

As mortgage lenders loosened their standards, consumer advocates (including me) warned that the boom could end badly and that many borrowers didn't understand the risks they were taking. Banking regulators finally met in October 2006 to consider regulating new, nontraditional mortgage products sweeping the country, but they couldn't agree on an approach, so the loans remained unregulated.

The Federal Reserve waited until 2008 -- two years after the subprime mortgage crisis began and 14 years after Congress gave it the explicit authority -- to use its power to ban unfair, deceptive or abusive mortgage lending practices.

Consumer advocates pleaded with regulators for two decades to curb credit card issuers' increasingly egregious anti-consumer practices, to little avail. It wasn't until January 2009 that banking regulators took aim at some of the most indefensible practices, such as double-cycle billing, jacking up rates on existing balances on a whim and moving due dates to increase late fees. Even then, issuers were given until July 2010 to comply. Congress finally stepped up with much stronger credit card reform, scheduled to go into full effect in February.

Payday loan outfits now outnumber McDonald's, Burger King and Wendy's outlets combined, and little has been done on the federal level to curb the practice of making two-week loans that carry an effective annual interest rate in excess of 400%. The one effective move involved the military: Lenders were banned from charging service members rates above 36%. That 2006 law succeeded in clearing payday lenders from the entrance of nearly every base in the nation, but it didn't stop their growth in low-income and even middle-class neighborhoods.

Some people would grumble that we're trying to create a nanny state and that people should be responsible for their own choices. The problem with that logic is that the people making the bad choices aren't the only ones who pay.

The mortgage crisis is just one example. Many of the people who were herded into risky, expensive loans actually qualified for plain-vanilla, prime mortgages -- a fact that reflects the incentives mortgage brokers and lending officers were given to push the toxic alternatives.

If those folks had gotten the mortgages they deserved, the crisis might not have gotten so severe. As it is, plenty of people who did stick to plain-vanilla loans have nevertheless lost jobs, homes and often a big chunk of their savings to the Great Recession that resulted.

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We're seeing outsized consequences unfold with credit cards as well. For years, issuers encouraged people to take on more and more debt by boosting credit limits, aggressively marketing cards to teenagers and people with poor credit, and lowering minimum payments.

Now it's a rare credit card holder indeed who hasn't had a limit lowered, an interest rate jacked up or an account closed as the credit card industry reels from the fallout of its unwise lending practices.

Take a second to click and protest

Given all this, it's almost laughable when critics warn that a Consumer Financial Protection Agency would stifle innovation.

As far as I can tell, the primary beneficiaries of financial innovation in the recent past have been the Masters of the Universe on Wall Street, who reaped big bonuses right up to, and even after, their bright ideas nearly cratered our economy.

Video: Consumer Financial Protection Agency pros and cons

So if innovation means more exploding mortgages, loans with triple-digit interest rates and credit cards with terms that can change on an issuer's whim, then I'm all for a little stifling.

If you agree, the time to let your lawmakers know is now. You can find a great summary of the 89-page bill, courtesy of The Wall Street Journal, here. And you can find your congressional representative here and your senators here.

What would the Consumer Financial Protection Agency do?

Send them a message something like this: "Stay strong against the lobbyists who are trying to decimate the Consumer Financial Protection Agency. We need a strong federal advocate to protect consumers from unfair, deceptive and abusive financial practices."

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Published Nov. 6, 2009

Comment

Hear! Hear! The LACK of oversight is PRECISELY what got us in this mess in the first place! If they wont regulate themselves, and they obviously WONT, then we will do it for them!