Consumer Financial Protection Agency

Tom Brown over at Bankstocks.com has a great piece on the Consumer Financial Protection Agency that Congress is in the process of creating and giving some teeth.

From the article:

The CFPA, as you probably already know, is supposed to be a financial-products version of the Consumer Products Safety Commission. The idea, apparently, is that it will regulate consumer financial products, from credit cards, to mortgages, to payday loans, to ensure that they are “safe” for consumers. As a practical matter, that will presumably mean the agency will, for instance, cap fees and rates on credit cards, limit prepayment penalties on mortgages, and who knows what else.

Which is to say, the CFPA will be unique among banking regulators: it will exist to, at the margin, help weaken the financial system, by preventing banks from offering profitable products that their customers actually want. Instead, the agency will get in between lender and borrower and force banks to price key products at levels that will either undermine their profitability or render them uneconomic, or useless, or both.

.......But the CFPA won’t just hobble the banking industry’s recovery. It will also reduce the amount of credit available to individuals and businesses. Say what you will about the aftershocks of the subprime bust, the democratization of credit is a good thing, not a bad thing. Innovative lending products—yes, even ones aimed at subprime borrowers—can, when properly underwritten, finance home purchases and business startups and expansions that would otherwise go unfunded. If CFPA meddling renders some of these products unprofitable, lenders simply won’t offer them. How’s that supposed to help fuel the recovery?

Critics of the banking system say that the credit crunch is proof the industry needs to be more tightly regulated. No. As it is, the industry’s overseen by four separate agencies. Where were they when lenders went off the deep end in 2006 and 2007? Besides, the market itself has already imposed more new discipline on the banking industry than any new passel of bureaucrats can. The list of institutions that have collapsed, from Lehman Brothers, to Washington Mutual, to Countrywide, is long and impressive. Their demise has concentrated the minds of the executives that manage the institutions that remain. So, CFPA or not, you won’t be seeing many 95% LTV no-doc option ARMs being written any time soon.