Friday, September 24, 2010

What To Expect from the Bureau of Consumer Financial Protection

Much has been made of Elizabeth Warren's rather tortured, strangely-handled appointment to head the federal government's new Bureau of Consumer Financial Protection. I've written about that aspect of her long-awaited appointment here on my companion political blog.

In this post, though, I'd like to consider what this new agency is likely to do to and for US financial consumers.

According to a Wall Street Journal article on the subject, Warren is to oversee a staff which will now commence writing hundreds of pages of new rules and policies governing practices at financial firms.

Warren is now attempting to spin her efforts as being "willing to cooperate with business leaders."


Anyone who's seen Warren's scolding, imperious, inquisitorial manner during her TARP Oversight Committee will find it hard to believe that statement.

Instead, Warren has spoken of "tricks and traps" that consumer lenders employ, and of calling for "fundamental changes to the way rules are written in Washington." According to the Journal article, Warren wants two-pages contracts for mortgages and credit cards. It's not clear how that would offer more protection to consumers, unless the language is so sweeping as to provide for nearly-unlimited lender liability.

You don't really have to know just what new regulations will be written to understand the effects they are likely to have on consumer lending. Rather than allocate credit according to a consumer's ability to pay, new regulations are more likely to result in no access to credit whatsoever for borderline borrowers.

If consumer lending documents truly become distilled to one or two pages, it's reasonable to assume that only the safest credits will be funded. The fewer terms and conditions are allowed, the more assured lenders will want to be that their customers, and their loans to them, are very low-risk.

Just stepping back and considering Warren's overall belief that lenders have behaved predatorily, and consumers need to be 'protected,' it's a good bet that the price of credit will rise, when it's available.

Perhaps a good example of this likelihood was Warren's reaction to a question from Jack Welch on CNBC's morning program yesterday. When Welch asked Warren if she thought her efforts would increase the price of credit, she replied,

'That's the wrong question to ask.'

Amazing, isn't she? Simply ruling an inconvenient question off limits, out of bounds, to be ignored. Which she did.

She went on to claim, without any examples, that whole companies existed simply to take advantage of consumers with 'tricks' to make them pay exhorbitant fees and rates. Then resorted to the hoary old references to 'families' to contend that all was amiss in the finance industry. Not just a few bad apples, according to Warren, because she never actually admitted that there were honest lenders out there.

Instead, Warren painted a picture of poor, uneducated, stupid consumers waiting to be fleeced by sharp lenders. In her world, consumers sign loan agreements they don't read or understand, despite being adults and understanding that nobody is making them borrow money. For a glimpse of this, go find and watch CNBC's House of Cards documentary. The scene with the large California woman who knew she couldn't afford her mortgage, but figured that 'if they want to give me the money, they must believe it's okay and I can afford it.'

That woman is the prime example of the average consumer in Elizabeth Warren's world. In reality, of course, no amount of regulation or protection will prevent such a person from making mistakes, borrowing too much money, at unaffordable rates. But don't try to tell that to Warren.

Thus, as with most regulatory overkill, the results of her efforts will, typically, be the opposite of intentions. In this case, it will not facilitate borrowing for lower-income borrowers, but probably eliminate them from qualifying for loans at all.

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