By Jonathan Mintz, the Commissioner of the New York City Department of Consumer Affairs, and Richard H. Neiman, the Superintendent of Banks for the State of New York:
For over a year, most of us have agreed that reform of our financial regulatory system is essential to our future financial stability and economic growth. Yet further consensus has been difficult to achieve.
With House committee debate and markup of Congress’s reform bills underway we, a bank regulator and a consumer protection official write to unify two perspectives that have created more conflict than necessary in this debate. We reject the myth, as many have unfortunately framed it, that consumer protection and prudent bank regulation are in conflict. Risky or deceptive financial products hurt the economy as a whole as much as they hurt the consumer. The public deserves — and our economy requires — that we concentrate on a strengthened system of financial oversight that demands clear, fair, and prudent banking and lending products and practices.
More important than the discourse over whether it would be better to combine or separate bank regulatory and consumer protection agencies is the idea that we first collectively agree that the solution must leverage and strengthen the resources of both disciplines. The New York State Banking Department (NYSBD) is the oldest bank regulatory agency in the nation, regulating state-licensed and state-chartered financial entities. New York City’s Department of Consumer Affairs (DCA) is the first municipal consumer protection agency in the nation, enforcing a fair and vibrant consumer marketplace. Through our cooperation in developing consumer products and financial education programs, we have experienced firsthand the benefits of combining our perspectives and offer three observations based on that experience.
First, smart consumer protections enhance choice and encourage a more competitive and more stable marketplace. Consumer protection at its core is about a clear offer that can be meaningfully accepted; it is a red herring to suggest that consumer protection leads to limitations on consumer choice. Excessive latitude toward overly complex, aggressive and deceptive marketing created a robust but short-term recipe for profit, but sacrificed sustained profitability, a stable customer base and ultimately the entire economy. And it decimated millions of individual families’ financial stability, primarily those least able to afford having their modest resources plundered.
Second, while expanding financial literacy is critical, it is insufficient alone to protect consumers. Deceptive practices must be banned and truly effective disclosures for complex products must be required. The vast bulk of consumers who avoid mainstream banking do so because of well-founded fears of unexpected and destabilizing fees and hidden product features, not a lack of education. Overdraft protection plan fees are the prime example. The Federal Deposit Insurance Corporation reports that overdraft fees on debit transactions-which average $27 on overdrafts averaging just $20-represents a staggering annual percentage rate of 3,540 percent. According to a recent Moebs Study, bank revenues from these fees may total $38.5 billion this year alone. Credit products offer more of the same: hidden disclosures, costly fees and imposed surprises. In addition to prohibiting unacceptably unsafe financial products and services, we need to empower consumers to distinguish between safe and potentially dangerous products, for their benefit and the stability of our economic system.
Third, we therefore propose the development of a nationally recognized rating system that would clearly communicate product safety and complexity. With advice from diverse stakeholders, this rating function would be enforced across the spectrum of banking regulators. These product ratings would aid consumers in selecting suitable products, and would provide a useful tool for evaluating Community Reinvestment Act (CRA) compliance in a qualitative way, reforming the program’s stifling “check-the-box” mentality which fails to bring meaningful banking services to many communities.
For example, simple and transparent products would be appropriate for many consumers and could receive green light safety ratings. Product features that add complexity or riskiness for those with lower incomes could be given a yellow light designation. And products with features that are inherently dangerous or expensive to the majority of such consumers could be labeled with a red warning, alerting consumers to high risk. Think of skiing. Who would ever venture down a mountain without first knowing if the trail was rated for beginners or was a double black diamond, for experts only?
Approaches such as this ratings system wouldn’t constrain financial institutions to anything other than free market competition, while at the same time empowering consumers to choose the most appropriate financial products and services for their individual needs. If this idea can unite these two regulators, perhaps it can unite the two sides of the debate as well.
Posted courtesy New Deal 2.0.
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“Third, we therefore propose the development of a nationally recognized rating system that would clearly communicate product safety and complexity. With advice from diverse stakeholders, this rating function would be enforced across the spectrum of banking regulators.”
Kind of like Moody’s, S&P, and Fitches – so that people could make sense of all those complicated bonds, which they could never figure out on their own. Just saying.
The rating agencies actually did a decent job until they were corrupted by the rich fees and bad incentives of structured finance. Yeah, they were usually slow to downgrade, but pretty much everyone knew how to correct for that.
…and would provide a useful tool for evaluating Community Reinvestment Act (CRA) compliance in a qualitative way,…
Yeah, just what we need — more “compliance” with the CRA. People who are interested can google up some good analysis on the role played by the CRA in the whole mortgage disaster, particularly and especially in less than prime loans.
Personally I’ve never felt I needed to be protected from a bank. Right now I feel a greater need for protection from stupid and corrupt politicians who seem likely to continue shoveling money at those same banks.
Fresno-Dan nailed it. Everything, every product, every means to ‘save’ money or shelter it from inflation is revealed as a ruse, if one cares to look.
Financial education indeed. How about some independent journalists and editors who will ignore their corporate sponsors and multi-billionaire owners? Next: real consequences for real criminal behavior rather than selecting winners and losers among brokers/bankers/businesses. Not happening either, is it? Just ask those still trying to get their principal back in the Auction Rate Securities mess with no one to nail or prosecute, those muni-bonds were supposed to be simple and secure forms of investment…lol. Another brain child of Phil Gramm who thinks we are all just a bunch of losing whiners. As a former nurse, I know just the spots to produce a nice LOUD whine and oh what I wouldn’t give for the opportunity.
I’m well educated thank you, in economics 101 that is an unforgiving task master. There was no ‘new economy’ after all, merely a new casino run by insiders who continue to be rewarded fabulously for creating money out of thin air ala the magic shows in Vegas.
I’m educated, banks losses were taken on by me, average ordinary taxpayer to unfreeze the credit markets for individuals and small businesses. That didn’t happen either, did it? We all lose while the super educated, best and brightest, wealthy elite think we don’t get how we are being robbed by them daily. I look at the price of gasoline and grains-yup I get it.
Mmm, seems like a subtly placed follow up to suggest some of what should be done rather than taking 175 scalps.
So, who’ll have the political “cojones” to make it happen? Reform is hamstrung by politicians hamstrung by political campaign culture. If people want independent politicians, then politicians will have be freed from their patrons. I am not excusing them, its just the facts. At a bare minimum, no political candidate (so no congressman) should be allowed to accept contributions from anyone not eligible to vote for that candidate (no PACs, just registered voters) – but try telling that to a professional politico, or the industry that depends upon them, or the corporate goons on the Supreme Court ….
I like your suggestion, but I am old enough and cynical enough to know that the money (legal and illegal) will never be shut off. Therefore, the solution –Term Limits, Term Limits, Term Limits.
Brilliant. Another attempt at unilaterally disarming government to the advantage of corporate interests.
Ever seen anyone propose term limits on lobbyists and ‘Think Tank’ members? You really want these crooks and snake-oil salesmen to be the only ones with experience in DC? Good luck with that.
Public campaign financing. Harsh and immediate prosecution of any individuals or organizations involved in bribery of representatives (let’s call a spade a spade here…)
Bank credit card abuse and fees alone could have caused an end to consumer purchasing and a return to saving that triggered this collapse. $38.5 Billion in one year is a lot of angry people who have been taken advantage of –nickled and dimed to death by an industry with no conscious or sense of responsibility. Their checking account services suck; are not at all timely for depositors; still hanging on to checks written on one branch and deposited at a different bank across the street for 6 days to draw interest; and using their eChecking to pay bills is worse.
A more stupid bunch is unimaginable. The only thing they do well is shoot holes in the law and find the bigger sucker.
The Chinese got it right: American finance need parental supervision.
From Karl Denninger’s excellent post on credit card increases. Looks like the banks did what health insurers only threatened to do: pass a law protecting consumers and we’ll raise our rates on them:
This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.</a<
" …There are approximately 116 million households in the US. As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP "
From Karl Denninger’s excellent reporting and analysis of credit card increases. ” …There are approximately 116 million households in the US. As a consequence the decrease in disposable personal income attributable to this sort of interest rate change is approximately $113 billion, or a bit under 1% of GDP ” This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.
Looks like the banks did what health insurers only threatened to do ‘pass a law protecting consumers and we’ll raise our rates on them:’
Link to Karl Denninger’s article This is the sort of thing that, in my opinion, makes meaningful economic recovery impossible.
Link to Karl Denninger’s article on credit card interest rate increaseshttp://market-ticker.org.