What Do Barney Frank's Changes Mean for Consumer Financial Protection?

Yesterday, Treasury Secretary Tim Geithner testified before the House Financial Services Committee to kick off this fall's attempt to pass Financial Regulatory reform. While Geithner delivered a surprisingly forceful performance -- perhaps his best public appearance -- the show was stolen by a memo [PDF] released by Chairman Barney Frank's office the day before, announcing modifications to the Consumer Financial Protection Agency legislation designed to make it more palatable to skeptical members of Congress.

The modifications come in response to charges of regulatory over-reach and explicitly spell out what ought to be common sense to preempt the Chamber of Commerce's fear campaign (no, butchers and doctors will not be affected by the CFPA) and a few technical fixes that shouldn't worry consumer advocates. The biggest worry is the elimination of the "plain vanilla" requirements, which would mandate that lenders offer simple, basic financial products alongside whatever other options, risky or not, they would normally lend. But for the time being, that's out the window.

Is it the end of the world, consumer-protection wise? According to consumer advocates, not really. Ira Rheingold, the executive director of the National Association of Consumer Advocates, e-mails to say "the devil is in the details -- but I think you can still have a pretty effective agency." Others made similar points, noting that the agency will still have broad rule-making power over the entire industry. And the loss of plain vanilla isn't the end of the world: The agency can still right rules to ensure that standardized, understandable contracts are used by lenders so that consumers are still protected.

Interestingly, Geithner wouldn't commit to supporting Frank's specific changes; asked about the elimination of plain vanilla by Representatives Maxine Waters and Jeb Hensarling, Geithner said that the chairman's ideas were "helpful" but declined to take the plain vanilla option off the table:

Look, our judgment was -- in shaping these recommendations ... the sort of simple proposition that consumers should be given the choice of opting for a simple 30-year fixed mortgage, for example. Now, they shouldn't be restricted from the ability to do something different to better meet their needs, but that should be one of the options they're able to choose from. And we want to make sure the system as a whole does a good job of providing that choice. ... These are judgments the committee's going to have to work through. And, as I said and we've always said, there are different ways to find this balance.

There are still a lot of moving parts in this bill, and a lot of opposition to surmount. These concessions are mostly smart politics, not undermining policy, that you have to be leery about going forward, especially in the Senate. Whatever happened to these guys?

-- Tim Fernholz

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