You might think one of the chief purposes of a new consumer financial protection agency (CFPA) would be to shield Americans from lenders that charge people incredibly high interest rates for loans. You'd be wrong, according to sources close to the legislation being drafted in the Senate. The New York Times reports:

Under the proposal agreed to by Mr. Dodd and Mr. Corker, the new consumer agency could write rules for nonbank financial companies like payday lenders. It could enforce such rules against nonbank mortgage companies, mainly loan originators or servicers, but it would have to petition a body of regulators for authority over payday lenders and other nonbank financial companies.

Consumer advocates said that writing rules without the inherent power to enforce them would leave the agency toothless.

And they're right. This provision would significantly limit the effective reach of the CFPA.

On one hand, this couldn't be more absurd. If any type of firm appears to be guilty of usurious loans, it's nonbank, nonmortgage finance companies that dole out payday loans and the like. The annual interest rates on these products often well exceed 100%.

Yet, there's a reason why these companies charge such insane rates: because they must. They provide credit to individuals with poor credit histories. That means the chances of them getting back the money they loan out is quite low. And therein lies the reason why they must charge so much interest.

The CFPA could eliminate these businesses altogether if it deems such loans as too dangerous for borrowers. While that might seem just from a consumer protection standpoint, do we really want an environment where consumers with poor credit can't obtain such emergency loans?

I'm not sure, but I would err on the side of letting these lenders charge what they want -- so long as borrowers fully understand what they're getting into. I'm lucky enough to never have been in a situation where I where I needed money so badly as to accept a 300% APR loan, but if I were so desperate, I'd want the option to do so. I would, however, be sure I understood all of the terms of the loan. So if better disclosure is a major goal of a CFPA (and it should be), then these nonbank finance companies should not be exempt from enforcement.

The route the CFPA appears to be taking is about what I expected. Whatever is eventually agreed on will be so watered down that Congress might as well not have bothered. First, we hear that its independence may be compromised, as it will be housed in an existing regulator like the Fed. Now we're beginning to see just how limited its enforcement powers will be. From the reports we're hearing, whatever the Senate eventually comes out with will likely feature a CFPA that's a mere shadow of what its supporters originally hoped.

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