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Elizabeth Warren's Financial Product Safety Commission

March 5, 2009

Senator Durbin (D, IL) is soon expected to introduce legislation which would create a federal “Financial Product Safety Commission” (FPSC). This concept was originally proposed by the ever-fabulous Professor Elizabeth Warren of Harvard Law School (pictured).

Her idea to make a regulator for financial products modeled on the Consumer Product Safety Commission has been floating around for a while, and was perhaps first explained to the public in a May 2007 article in Democracy. The article begins with the powerful “toaster analogy”:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street – and the mortgage won’t even carry a disclosure of that fact to the homeowner.

Most reasonable people would have a hard time arguing against the regulations which protect consumers from unsafe toasters, food, drugs, and toys. No one can imagine an America without these basic protections—and in fact we become righteously outraged when they fail us (as in the recent peanut situation). Professor Warren puts it well:

“We live in a world where regulation works most of the time,” she said. “We don’t eat tainted meat and we don’t drink adulterated milk because we have fairly good regulation. Financial products are no different. Free markets are not well supported when consumers are at risk for injury.”

The Financial Product Safety Commission would be solely dedicated to consumer safety. It would review financial products, “eliminate the hidden tricks that make some of them far more dangerous than others, and ensure that none pose unacceptable risks to consumers.”

The FPSC would be novel in at least two important ways: 1.) right now, there are many agencies who deal with consumer protection and their patchwork of regulations leave huge gaps, and 2.) these agencies only secondarily responsible to consumers per se. Their prime concern is the stability of banks and other financial institutions – and, apparently, they aren’t too good at getting that right either.

The problems with the current regulatory regime are compounded by the fact that the various regulators (such as the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Reserve Board and National Credit Union Administration) are funded by the banks they supposedly regulate – and they have to compete for the banks’ business. The system encourages regulators to be as lenient as possible in order to attract more lenders into their jurisdiction (and thus more funds). The Washington Post did this article about lender charter-shopping, giving a particularly scathing indictment of the OTS.

A strong FPSC  could fix much of this. Of course, it’s hard to predict whether the agency would be “strong.” Would it be given enough clout and muscle to really get the job done? Would future agency leaders (probably political appointees) aggressively fight for consumers, or might they cave into lender pressure and be too tame?

In this new world, consumer advocates would have to fight to make sure the agency is strong and under the right leadership. In the meantime, introducing legislation to create an FPSC is a good start. Kudos to Senator Durbin.

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