The Wonk Room

Warner Concerned Consumer Protection Agency Will Be ‘Divorced From The Reality Of The Market’

Sen. Mark Warner (D-VA)

“Is this going to be some kind of poor cousin, located across town, that will always be struggling to have the resources, personnel and expertise?” Warner, a Democrat on the Senate Banking Committee, said…Another concern is that the agency, “divorced from the reality of the market and the reality of the financial institution, becomes so focused on a gotcha mentality that it overdoes,” Warner said. He said he may be “convinced” to back the agency.

Warner’s concern about the agency being a “poor cousin” is incredibly valid, and highlights one of the problems inherent in our current regulatory system. At the moment, many regulatory agencies are tasked with policing both the safety and soundness of financial institutions and consumer protection. But as Adam Levitan pointed out, “a bank cannot be safe and sound without being profitable, and abusive and exploitative lending practices are frequently quite profitable (there’s no other reason to engage in them). If a regulator cracks down on an abusive lending practice, it might endanger its regulatory charge’s safety and soundness.”

Thus, consumer protection becomes a secondary thought, if it’s considered at all. If the new agency does not have the resources or clout to be anything more than the bank regulators’ annoying little brother, it simply won’t be effective.

The second part of Warner’s concern holds less water. The “reality of the market” is that predatory lending can be a highly profitable business, especially when its encouraged and abetted by Wall Street investment banks. For instance, originating subprime mortgages was a $600 billion business in 2005. No one is balancing the concerns of the consumer against the banks’ charge for profits.

The new agency will have to be intimately familiar with the various markets for financial products, but from a consumer perspective, with consumer protection the foremost objective. It’s purpose is to write rules and issue guidelines ensuring that the “reality” that banks and mortgage lenders have crafted doesn’t consistently put consumers on the short end of the stick. I hope Warner doesn’t find that too objectionable.