by Joseph Kenny | 10/26/09

President Barack Obama appeared on television within the last week and announced he wants to establish a new agency at the federal level. This agency would be named the Consumer Financial Protection Agency. Some people applauded the idea while others moaned that it is yet another level of government control and complexity. So which is it?



To understand why this agency has been proposed you have to go back to the issues leading up the recent financial crisis that has resounded around the world. Consumers and homeowners are looking to the government for current help as they cope with lack of credit, unemployment and foreclosures, but the President is trying to prevent the same lending problems leading to the recession from happening again. He is looking ahead and hoping to prevent another economic crisis.

Unfortunately many consumers are hoping for immediate help as they struggle to hang on to their houses and continue to pay off high interest loans. But this new agency will not be formed quickly enough to help many consumers having problems right now.

Right now there are 7 federal agencies responsible for the financial services industry regulation and monitoring. Out of the 7 agencies there are 5 that are also responsible for financial institutions. The new Consumer Financial Protection Agency would represent a consolidation of all 7 agencies into an umbrella regulatory agency.

The reason this agency is being proposed is because many people have come to believe that banks and other financial institutions were able to sell poorly structured mortgages and predatory loans with unreasonable terms to consumers because one agency didn’t know what the other agency was doing. They believe there were too many regulatory loopholes, or just plain holes, in the lending process.

The ultimate goal of the new agency would be consumer protection. Many of the current regulations seem to protect financial institutions at the sake of consumers. Not everyone agrees with this assessment though. Some people oppose the formation of yet another federal government regulatory agency with its inherent bureaucracy.

One of the issues is the fact bank regulators are more concerned with keeping financial institutions sound and that is not always a goal that is reconcilable with consumer protection. That is why so many poor mortgages were issued and then eventually sold as packages of mortgage backed securities. Bank balance sheets look good but consumers were saddled with deceptive mortgages or loans.

Supporters of the proposed new agency believe that consolidating consumer protection regulations under a single umbrella agency will lead to more effective and fair lending practices. The agency would have regulatory power over any financial institution involved in credit or payment products.

An impressive list of policy makers and nonprofit agencies has expressed support for the Consumer Financial Protection Agency. They include Chris Dodd, Barney Frank, the National Consumer Law Center and the Center for Responsible Lending to name just a few.

There is a good chance this new agency will be formed. If it is formed consumers will expect to see the lending process streamlined and improved.