Is it time to be optimistic yet?

It's official, the Administration's Financial Regulatory Reform plan includes what consumer advocates have been referring to as a Financial Product Safety Commission.
It's the third point in the official plan available at this Treasury Website for the Regulatory Reform initiative or at financialstability.gov, and they're calling it a "Consumer Financial Protection Agency." Obama has been using Warren's exploding toaster/mortgage analogy (they can both cause you to lose your house!), so I wonder why the plan wouldn't adopt her corresponding Consumer Product Safety Commission/Financial Product Safety Commission analogy.

Anyway, the name is less important than the details of what this agency will do. That includes setting baseline standards for consumer financial products, such as verification of a borrower's ability to pay, banning methods of broker compensation that create an incentive to rip people off, and requiring that borrowers who qualify for prime products "opt out" before they are sold an "alternative" product. Most notably, the consumer protection standards set by the agency will be a floor, not a ceiling. That means that those states which go further to protect consumers won't be preempted by federal law.


Obviously, the banking industry is opposed to this. I have heard the Financial Services Roundtable and the American Bankers Association on NPR over the last couple of days saying that we don't need a new agency to protect consumers because lenders have an incentive to act in the consumers interest in order to protect the institution's reputation, and that imposing any standards on financial products will "stifle innovation." These arguments show that either: (1) the financial services industry has a very short memory, or (2) they are hoping Congress does.

Turning back to the plan- it gets even better! The OCC and OTS would be eliminated, so that banks won't be able to shop around for the regulator who will treat them the most favorably and aggressively shield them from the enforcement of state law.

It's a beautiful thing.