You Call This Financial Reform?

In the past four months, President Obama has talked extensively about creating a new federal agency to protect the financial rights of consumers, monitoring everything from the terms of home loans to credit-card contracts to bank accounts. But so far, the president's talk hasn't translated into reform. In fact, the legislation that was originally written to safeguard consumers' financial health has been gutted so much in recent weeks that it no longer applies to real-estate agents, auto dealers, tax preparers, attorneys, retailers, or credit-rating agencies. Banks, credit-card companies, and mortgage brokers no longer have to offer the most basic financial products, such as 30-year fixed mortgages or basic credit cards, nor do they have to ensure that consumers understand the nitty-gritty of contracts and newfangled products. Worst of all, at the end of this debate, there's no guarantee that Congress will pass even the weakest version of financial reform. "If you start horse trading in the first stage, you have to worry about where it will go," says Kathleen Keest, senior policy counsel at the Center for Responsible Lending.

The House Financial Services Committee's horse trading has begun in earnest this week, and Rep. Barney Frank (who's leading the effort) is supposed to unveil the latest iteration of the bill in the next few days. But given the current laundry list of exceptions, what will this hypothetical agency regulate? Provided that it does not get weakened any further, the agency might have some bite. It could still monitor consumers' credit-card rules, loans, bank accounts, and other basic financial products; it will research and collect info on the companies that provide these services; and it will give both states and federal government the power to play financial watchdog. "Having the banks in charge of consumer protection hasn't worked," says Lauren Saunders, managing attorney for the National Consumer Law Center. "[But this is] a well-thought-out proposal."

At its most basic, the bill would consolidate the consumer financial-protection laws under one authority. Right now, several agencies, from the U.S. Securities and Exchange Commission to the Federal Reserve and the Federal Deposit Insurance Corporation, oversee financial laws. Together they form a disjointed group of regulators that some savvy companies have managed to play against one another, much as children manipulate divorced parents, to advance their business interests.

The agencies do not always use the full extent of their power, particularly if that power seems tangential to an agency's main mission. The Federal Reserve, for instance, has been able to prevent deceptive and unfair practices in mortgage lending since 1994, says Jeff Sovern, a law professor at St. John's University. The Fed received that power from Congress as an addendum to the Truth in Lending Act, but Sovern says the Fed did not use its power until last year. "The Fed's primary issue is macroeconomics," he says. The consumer financial-protection agency can also collect data and research on the businesses and organizations it regulates. This sounds wonky, but in reality, regulators often simply ask companies to self-report.

Finally, the most controversial section of the legislation would let both states and the federal government watch over consumer financial problems. States could pass tougher and more enforceable laws and act as the first responders in a financial panic in a way that they have not been able to do thus far if their laws conflicted with federal ones. "If the states that tried to rein in predatory lending had been allowed to implement their laws, it might have stopped this economic slide," says Travis Plunkett, legislative director of the Consumer Federation of America.

But ultimately the naysayers of the new agency may be stronger and better-funded than its proponents. Banks (even ones that received bailout money) and industry lobbyists have spent millions of dollars to kill the bill, claiming that the new agency will merely increase bureaucracy. The Wall Street Journal's editorial page, in an op-ed titled "Another Scary Czar," argued that a consumer financial-protection agency will lead to more lawsuits, and the U.S. Chamber of Commerce has spent a few million dollars on print and radio ads that incorrectly argue that small neighborhood businesses will be more hurt by this law than the banks or financial firms responsible for the country's economic mess.

Financial regulation is not a sexy topic. The consumers who potentially could benefit the most from a new regulatory agency are the same ones who least understand the bill. The link between a consumer-protection agency and people's lives is not as clear-cut as it was with other consumer laws, such as the National Do Not Call Registry. "This is such an important issue, but I don't think that many consumers are thinking, 'We need to get through this to get rid of regulatory arbitrage,' " says law professor Sovern. It's a tough and messy topic, for sure, but it may be one way to close the gap between the residents of Wall Street and Main Street.