At today's Senate Banking, Housing & Urban Affairs Committee hearing on the proposed Consumer Financial Protection Agency, representatives from both the American Bankers Association and the American Enterprise Institute outlined the chilling effect such a new regulatory body would have on financial innovation. The proposed agency would require purveyors of more-exotic financial products, such as payment option adjustable-rate mortgages, to also provide consumers with "plain vanilla" alternatives such as 30-year fixed mortgages, and with simple disclosures for meaningful comparison. The agency also could ban certain unfair terms and practices, and require brokers and other financial intermediaries to determine if their products really were affordable to the borrower.
Saddled with those requirements, among others, many financial institutions won't bother to offer innovative products to consumers who might indeed benefit, noted Edward L. Yingling, president and CEO of the American Bankers Association. The costs of compliance would be too high, he asserted. That could stifle choice and competition, which ultimately would be bad for consumers. "Ideas that could give consumers benefits or lower costs would never see the light of day," he said.
"Why should anyone take the risk to create a new product?" asked Peter Wallison, Arthur F. Burns Fellow at the American Enterprise Institute. "Even if the CFPA will review it to determine whether it is accurately and fairly described ... the developer will still have to decide whether the people who want it are suitable to have it. The suitability decision can be expensive; a provider's better choice might be to stay with plain vanilla products and give up the idea of developing new products to attract new customers."
I'd bet many of the consumers featured on Consumers Union's advocacy Web site, Defend Your Dollars, wished they'd never heard about innovative financial choices. Several of the profiled mortgage-fraud victims were told the exotic loans they'd signed up for would save them money, or leave more money in their pockets each month. Clearly they didn't understand what they were buying. With better disclosure and an opportunity to compare, they might have passed on those innovative options and avoided financial ruin.
Choice and innovation always are welcome in our economy. When they're marketed inappropriately, as they often were in the last several years, consumers suffer. The new bill focuses on reducing that suffering by making financial institutions more accountable and responsible in the marketing of their products, innovative and otherwise. That's one reason we need the new CFPA.–Tobie Stanger
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