Ari Weinberg

Who Will Protect Us from the CFPA?

President Barack Obama spent Friday afternoon stumping for the Consumer Financial Protection Agency.

The new regulating body, first proposed in June, would stand up for consumers in a broken world of financial regulation largely built on ensuring the safety of institutions and products.

The agency is for those “who signed contracts they didn’t always understand offered by lenders who didn’t always tell the truth.” In remarks this afternoon, the president added, “They were lured in by promises of low payments, and never made aware of the fine print and hidden fees.”

The issue, however, is that massive protection for the unwitting or the unknowing will end up creating more expensive and rigid products for everyone.

So before the administration and Congress press too hard on the reform button, they should look to the recent credit card bill for evidence.

Reuters blogger Felix Salmon rightly pointed out in a recent column that credit card rates for people assessed interest hit a low of 11.96% in early 2003, hit a high of 15.24% in August 2007 and after a slight dip are back to 14.90%.

Card companies, en masse, have been raising rates before the new laws fully take effect. This is at a time where borrowing costs FOR EVERYTHING ELSE are at all-time lows. Go figure.

The catch with new (and old) financial products is that we don’t know the extent of damage they can cause until they are abused.

Subprime mortgages used to be a backwater of the home loan industry, until everyone and their mother became a lender and every hedge fund wanted to own the loans. A credit card was supposed to serve as a convenient line-of-credit for a large transaction, until people started depending on them. Overdraft protection was supposed to fulfill your payment in the rare case that you didn’t have enough in your account, until rare become everyday.

Now, in these days of online accounts and quick transaction, the burden of overspending, overborrowing and overdrafting falls directly on us.

“This is not intended to take accountability away from consumers,” said Austan Goolsbee, a member of Obama’s Council of Economic Advisors. He and many others contend that the mish-mash of federal and state regulators allowed financial operators to “wiggle their way in between regulatory cracks.”

In this way, the Consumer Financial Protection Agency would be concerned about innovations that pose risks. But, as with any innovation, you never know the risk is there until it HITS.

If you truly want a Consumer Financial Protection Agency, start with yourself, your own financial education and then start working on your friends and family. Sure, the government should be there for you, but you need to be there first.  

“Caveat emptor” is the longest standing consumer warning for a good reason.