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The potential Consumer Financial Protection Agency (CFPA) is meant to protect us from harmful financial products by imposing some limits on credit cards and financial products. Before it's even come into existence, it got some limits of its own last week, as the promise of plain vanilla terms -- by which consumers could understand and compare products -- was scrapped.
The CFPA faces stiff opposition from the banking and finance community. In what's become a common refrain, they fear too much government intervention would harm competition and innovation in financial products. (Indeed, should the CFPA come to exist, we may see a slowdown in the laboratories that produce breakthroughs such as universal default and unlimited flavors of 30% interest traps on credit cards.)
To make the CFPA more palatable, Congressional Democrats and the Obama administration agreed to drop the call for "plain vanilla" terms on financial products. "Plain vanilla" terms have been part of the call for the CFPA by many who see consumer confusion about the terms in credit cards, exotic mortgages, etc. as a primary cause of consumer bilking.
For a nice explanation of why we need plain vanilla terms, and the CFPA itself, see this interview with Elizabeth, a champion of the CFPA and meaningful consumer financial protection.
R.I.P., plain vanilla. As explained by Treasury Secretary Geitner, "There has been a lot of concern that if you invest the government with the ability to decide what's appropriate here and there, that will lead to less competition and choice."
It's hard to imagine a Consumer Financial Protection Agency having much impact without the ability of government "to decide what's appropriate here and there." The impact any CFPA will have might be predicted by how often and in what situations our leaders are willing to trot out lines like that one.
As explained by Elizabeth Warren, the convoluted nature of everything from credit card agreements to mortgage contracts, with no emphasis put on consumers actually understanding the terms, plays a large role in preventing meaningful competition from taking place. Consumers can't compare financial products and choose because each product is 30 pages deep in fine print "innovation."
No doubt we've had a full menu of all sorts of exploding arm mortgages and credit cards featuring 25 ways for your interest rate to skyrocket. What the banking lobby sees as competition and innovation, to others may look more like a menu chock full of tainted food.
We'll know much more about the future CFPA after the House and Senate submit legislation later this fall. It remains to be seen what powers the agency will have, and whether what's on our menu of financial products will be any healthier.