The Consumer Financial Protection Agency, the proposed regulatory body that would shield Americans from risky loans, predatory bank fees, and other sneaky financial practices, looks like it's going to die a slow, painful death. Yesterday, lawmakers and Obama administration officials agreed to cut a major provision from the legislation that would create the agency by removing a provision that would have required banks and other financial institutions to start offering "plain vanilla" products to consumers. (A "plain vanilla" mortgage, for instance, would include a fixed interest rate and a stable term of, say, 30 years.) Now, that provision is gone. "There has been a lot of concern that if you invest the government with the ability to decide what’s appropriate here and there, that will lead to less competition and choice," said Treasury Secretary Tim Geithner.
This move bodes poorly not just for the future of the CFPA but financial regulation in general. The plain-vanilla provision would have protected consumers from the kinds of deceptive financial products, such as adjustable rate mortgages, that precipitated the current economic mess, as well as predatory products like credit cards loaded with hidden fees. It wouldn't have gotten rid of these financial products, so consumers who wanted them would still have to do their own due diligence. But the plain-vanilla provision could have helped those consumers who aren't financially savvy enough to handle an option ARM or simply don't have the stomach to wade through the fine print of a mortgage contract.
Gutting plain vanilla marks a victory for big business and their allies in Congress, who see it as a major step toward to grounding the CFPA altogether. The US Chamber of Commerce, the biggest business lobby, has shown it will stop at nothing to "kill the bill"—and it has the firepower to do just that, having spent $23 million this year on lobbying (almost twice as much as the second-ranked organization). And the CFPA doesn't have a lot of friends among the regulators, either. The FDIC and the Fed don’t want the CFPA because it would encroach on their turf and steal some of their regulatory thunder.
To be sure, we need the CFPA, which would provide crucial consumer protection that the financial meltdown showed to be glaringly absent. But it's the clear the agency, which is backed by Congressional Oversight Panel chair Elizabeth Warren, now faces a staggeringly uphill battle. And even if it does make it into law, the agency might be stripped down to the point where it's toothless and useless, if this latest cut is any indication.