In June 2009, President Obama came up with a plan to reshape the US financial system. A big part of the plan included the creation of a new federal agency to protect consumers in all sorts of financial dealings, especially those involving consumer lending and credit. The new agency, called the Consumer Financial Protection Agency, recently came one step closer to becoming a reality.
The plan is the President's response to the financial meltdown that struck the US in late 2008 and early 2009 that led to the recession. The financial crisis was caused, the theory went, in part by an unregulated or under-regulated financial system, and particularly consumer lending and credit practices. Through predatory lending practices, millions of US consumers took on millions of dollars in credit debt. When the economy started to go south, they couldn't pay the debts.
The Consumer Finance Protection Act (Act) is part of the President's proposed plan to prevent another financial disaster. This piece of legislation (it's a "bill" when a new law is proposed), if enacted by Congress, allows the government to create the Consumer Financial Protection Agency (CFPA). This agency's job, as originally envisioned, was to regulate practically all consumer credit transactions: Car loans, credit and debit cards, bank loans, mortgages, "payday" loans, and payroll check cashing services. The idea is to make sure that consumers aren't charged excessive fees and interest rates, or aren't given credit at all unless they could established their ability to repay the debt.
Not surprisingly, the CFPA met resistance from lenders from the very beginning. Basically, more federal regulation and oversight meant less profit. Even the US Chamber of Commerce opposed the idea from the very beginning, stating that it would increase consumer costs and stifle small business credit, among other things.
Nonetheless, in late October 2009, the bill was approved by the House Financial Services Committee (Committee). It oversees all parts of the US financial industry, including banking, insurance, real estate and securities. Passing through the Committee is a big deal because now the bill can go to a vote in the US House of Representatives, and then eventually to the US Senate for a vote. The CFPA is one step closer to becoming a reality.
It's not all good news for the President, though. The Committee's version of the bill doesn't cover all of the financial transactions originally included in the bill. For example, auto dealers, retailers and certain professionals who extend credit - like attorneys and doctors - wouldn't be regulated by the CFPA if the Committee's version of the bill became law today. Many lenders first targeted by the bill are covered, such as mortgage loans, bank overdraft fees, payday loans, check cashing services and debit cards.
Time Will Tell
There's no way of telling if the CFPA will ever become a reality, and if it does, what types of financial services it will cover. Consumers and experts alike agree that more consumer protection is needed in many of the under-regulated or unregulated credit services targeted by the CFPA.
As consumers, you have a voice. Regardless of whether you agree or disagree with all or some of the CFPA, let your US Representatives and Senators know about it. This agency is meant to protect you. As it stands now, the bill contains some important new consumer protections, and you can have an impact on how it will end up.
Questions for Your Attorney
- Will the CFPA cover my Internet-based check cashing business, or just the brick-and-mortar locations?
- Who's going to pay for the new agency?
- How will the CFPA affect my current mortgage? Do you think there'll be some type program where my interest rate could be lowered?