On June 24, in "Financial Regulatory Reform: III," I blogged on the proposal in Financial Regulatory Reform--the Administration's blueprint for revamping the regulation of the financial industry--that Congress create a Consumer Financial Protection Agency. A few days ago the Administration issued a 152-page draft of a proposed statute establishing such an agency, and the draft helps to clarify the Administration's thinking and in doing so it reinforces the doubts I expressed in my earlier blog entry. The length of the draft is deceptive; pages have only 23 lines, the print is large, and the margins are generous; more important, most of the draft is taken up with bureaucratic details, involving for example the transfer of staff from other agencies. I shall ignore those details (though they may be minefields) and focus on what seem the key provisions of the proposed statute.
The objectives of the proposed statute are stated broadly, and to a degree inconsistently, as well as (of course) redundantly. The principal objectives are that "consumers [of financial products] have, understand, and can use the information they need to make responsible decisions," and "are protected from abuse, unfairness, deception, and discrimination," but also that "markets for consumer financial prodducts or services operate fairly and efficiently with ample room for sustainable growth and innovation" and that "traditionally underserved consumers and communities have access to financial services." The inconsistency lies in the fact that the more consumers are protected (largely from themselves) from being abused, deceived, and so forth in the purchase of financial products, the more those products will cost and so the less rapidly the market will grow and underserved consumers--a disproportionate number of whom are poor credit risks--will have access to it. The clearest example is a separate provision of the proposed statute that authorizes the agency to forbid arbitration clauses in consumer finance contracts. These arbitration clauses are inserted by the credit-card companies or other lenders, and so presumably--since consumer finance is a competitive industry--the clauses reduce the lenders' costs and therefore interest rates.