In the typical fashion, Congress is now attempting to solve a “crisis” by creating a new government agency with an unlimited budget and almost unlimited regulatory powers. The proposed agency is called the Consumer Financial Protection Agency, which is intended to protect consumers from making risky financial decisions.
The reality will be diminished choices for consumers, burdensome regulations on small businesses, federal mandates on the states, and a new patchwork of regulations for national banks.
In the proposed Consumer Financial Protection Act, the federal government would establish a new set of regulations on everything from state-chartered banks to Western Union. At the same time, nationally chartered banks and financial institutions would lose their preemption from state regulations and would have to start abiding by 50 different sets of state standards.
Only a Washington politician could come up with legislation that simultaneously contracts and expands states’ rights. The irony is that the bill will harm consumers.
The combination of new federal and state regulations will adversely affect local banks and small lenders, the ones small businesses rely on most. The end result will be that many consumers and small businesses will simply be denied access to credit because of the compliance cost to lenders of the new regulations.
Those who are able to secure credit will have to pay higher interest rates or service fees to cover the increased costs. This is why the U.S. Chamber of Commerce has warned the result would be “business closures, fewer startups, and slower growth. Overall, this would cost a significant number of jobs.”
The effect of the CFPA will be a patchwork of financial regulations across the country. Currently institutions like federally chartered banks only have to comply with federal regulators — versus having to comply with different rules in all 50 states.
There are good reasons for uniform laws for national banks. Can you imagine your ATM card working in Maryland, but not in Virginia? Or imagine different online banking laws in different states.
The bill also allows banks to be sued by attorney generals in all 50 states. Not only will consumers have to pay for this increased litigation, but they will also lose loan options as some lenders pull-back out of fear of increased lawsuits.
Finally, do we really want the federal government in the business of protecting us from ourselves? Most people would agree that lenders should disclose the terms of their loans and should not deceive customers, but do we want the federal government deciding what type of loan you can apply for?
President Obama’s proposal would have federal bureaucrats write the actual terms of loans. In fact, the legislation is drafted so broadly that Congress will abdicate its authority on issues like credit cards and home mortgage loan regulations to this new agency. This could leave the Consumer Financial Protection Agency as the decider of the amount of money you can borrow and how long you have to repay a loan.
Consumers can expect less access to credit, higher fees at banks, and increased taxes to pay for this new agency. The CFPA is a true quagmire that deprives states of their right to continue to regulate industries within their borders and it deprives federally chartered institutions of the ability to operate under one coherent set of regulations.
We do not need the federal government dictating to small business owners what kind of loans they can provide to their customers or what type of loans consumers can take out.
Michael Hough is the director of the Commerce, Insurance and Economic Development Task Force at the American Legislative Exchange Council.
