For years, financial institutions have had the ability to do business under several different charters, giving them the option to choose the regulator that sets the lowest consumer protection standard. Since regulators are funded from the fees that regulated institutions pay, there was little incentive to drive away banks by introducing stringent consumer protections. Cracking down on banks meant losing the fees that kept the lights on. This “race to the bottom” was a contributing factor to banking regulators’ inaction during the subprime mortgage boom and subsequent bust.
But improved regulatory accountability is only part of the solution. We need the hundreds of unregulated lenders that escaped oversight altogether, and that caused most of the damage in the mortgage crisis, to play by the same set of rules as banks do. Even with ever-lowering consumer protection standards, traditional banks were still hard-pressed to compete with unregulated mortgage brokers and consumer finance companies that flooded Chicago region communities with deceptive-by-design products with almost no oversight. Rather than lower consumer protection standards for banks, why not raise them for the reckless and unsupervised companies that crowded out more responsible lenders?
The Consumer Financial Protection Agency, the financial watchdog proposed by the Obama administration and embodied in H.R. 3126, would raise consumer protection standards across the board and ensure that consumers are protected from unfair and deceptive products, regardless of the type of company selling them. To the consumer looking for a mortgage or consumer loan, banking charters and licensing jurisdiction matter very little. Consumers want to know that the product they receive from one lender carries the same protections as a product from any other, and that all lenders––banks, mortgage brokers, and independent finance companies included––are playing by the same set of rules.