The Rationale and Cautionary Remarks on the Proposed Federal Consumer Financial Product Regulator and the Effect on Small Business
Excerpt: Saddled with debt, consumers are unable to spend on big, and even small, ticket items. This inability, in turn, hurts all businesses, particularly local businesses. The Obama Administration is considering whether to establish a new regulatory agency that will oversee financial products offered to consumers, such as home mortgage loans, bank savings accounts, and even other investments. This Emerging Issues Analysis looks at this proposal.
Professor Fanto writes: One fact of the current recession is that, saddled with debt, consumers are unable to spend on big, and even small, ticket items. This inability, in turn, hurts all businesses, particularly local businesses. Many of us have had the experience of seeing stores in our towns going out of business and empty storefronts. Certainly, consumers saved too little and unwisely took on more debt than they could afford, particularly in home mortgages, counting on ever-increasing real estate prices. However, consumers were also sold toxic loans and other financial products without fully understanding their implications, such as the resetting of interest rates and the penalties for nonpayment. The toxicity of these products exacerbates the current decline because consumers are driven into bankruptcy or their debt load is so large that their spending power is greatly curtailed.
The Obama Administration's financial reforms have so far mainly aimed at stabilizing the large financial institutions that hold the majority of the country's financial assets and at providing relief for some homeowners to restructure their mortgage debt. The Administration and its Congressional allies now intend to turn to substantive reform of the financial system, in addition to this stabilization. It is reported that the Administration is considering whether to establish a new regulatory agency that will oversee financial products offered to consumers, such as home mortgage loans, bank savings accounts, and even other investments. This commentary looks at the background to this proposal, discusses briefly the outlines of the current proposal, and then identifies potential problems with it. The Need for a Consumer Financial Product Regulator
At first glance, it is puzzling to call for the creation of a federal financial product regulator, for the frequent complaint about federal financial regulation is that there are already too many regulators. There are numerous federal bank regulators, from the Board of Governors of the Federal Reserve System, which regulates state banks that are members of the System and financial and bank holding companies, the Office of the Comptroller of the Currency (OCC), which regulates nationally chartered banks, the Office of Thrift Supervision, which regulates federal savings and loans and their holding companies, and the Federal Deposit Insurance Corporation, which, among other things, provides oversight of state banks receiving deposit insurance. The Securities and Exchange Commission (SEC) is the primary regulator of broker-dealers, investment advisors, and investment companies and of offerings of investment products, and the Commodity Futures Trading Commission regulates futures brokers, and trading in futures and commodities. The above list, moreover, is not exhaustive.