By Joe Valenti & Sarah Edelman, Center for American Progress
In October, a bipartisan budget deal was announced with great fanfare: Legislators across party lines agreed to a broad framework that could stave off a government shutdown. That’s the good news.
The bad news? The budget deal could use important consumer protections as a bargaining chip to prevent a shutdown.
Making this deal work would require moving must-pass bills through a reluctant Congress in the coming weeks; these bills may include dozens of unrelated amendments from special interests’ holiday wish lists. For Wall Street, this is a golden opportunity to present its own wish list of the financial regulations that it would like to roll back.
Ultimately, many policies supported by special interests—including shortchanging clean energy and clean water and defunding Planned Parenthood—could tag along as so-called budget riders on the bills that the House and Senate must pass to keep the government open. If this happens, President Barack Obama will have to make the difficult choice between shutting down the government and protecting Americans from many of the same predatory practices that led to the financial crisis.
Policymaking should happen openly and deliberately, rather than through ideological riders that slip through in eleventh-hour dealmaking. It is impossible to rank all of this year’s potential riders. With regard to financial reform alone, here are four consumer protections that may hang in the balance.
Rules against predatory, high-cost mortgage lending
Congress may attempt to undo rules that keep mortgages fair and affordable. Prior to 2008, lenders peddled high-cost, toxic mortgage loans that consumers could not afford to repay. These predatory loans eventually failed, triggering the housing and financial crises. In 2010, Congress included mortgage protections in the Dodd-Frank Wall Street Reform and Consumer Protection Act in order to prevent such risky lending. Ever since, industry lobbyists have been trying to weaken these critical protections, often framing rollbacks as measures intended to help small banks—even though regulators already provide enormous flexibility to small banks and even though most proposed rollbacks would simply make mortgages riskier.
An independent Consumer Financial Protection Bureau
Congress may also try to weaken the Consumer Financial Protection Bureau, or CFPB. Since it opened its doors in 2011, the CFPB has proven to be one of the most appreciated and effective federal agencies. During its short history, it has returned more than $11 billion in relief to more than 25 million wronged consumers. Yet Congress has hidden serious reforms to the bureau behind technical procedural changes—including reforms that would undermine its authority by turning it into a commission or taking away its ability to set its own budget. And just last month, the House passed a bill to micromanage the CFPB’s efforts to crack down on racial discrimination in auto lending. Without federal intervention, lenders will continue to lead borrowers of color to pay more than white borrowers with similar credit—even if they negotiate with the dealer. There have also been attempts in Congress to defend forced arbitration clauses that limit consumers’ rights to sue, a practice that the CFPB is currently working to overturn through regulation.
Regulations protecting retirement security
Retirement security could be at stake, too. Currently, it is perfectly legal for financial professionals to claim they are offering advice while they are actually selling products that may not be in a consumer’s best interest—a practice that costs savers and retirees as much as $17 billion annually. Earlier this year, the U.S. Department of Labor proposed new regulations that would close these 40-year-old loopholes, but Congress is trying to delay the rule.
Regulations promoting financial stability and preventing another crisis
Congress may also attempt to weaken protections against financial instability. In 2010, Dodd-Frank gave the Financial Stability Oversight Council, or FSOC, and the Federal Reserve the authority to establish prudential and supervisory standards for large nonbank financial companies. Congress extended this authority with the failures of Bear Stearns, Lehman Brothers, and American International Group Inc., or AIG, in mind. But some members of Congress have proposed making it more difficult for regulators to take preventative measures—by, for example, making FSOC procedures more cumbersome and more susceptible to legal challenge, or by exempting nonbank financial firms from supervision by raising the asset threshold above the Dodd-Frank level of $50 billion. Given the role that nonbanks played in creating the financial crisis, these changes would likely increase stability risks. Only financial firms stand to gain from such proposals.
Consumer protections are publicly supported and important to the economy
Actions against consumers’ interests—including those that roll back the clock to the days before the financial crisis—reflect a Congress that is out of touch with the American people. This summer, only 17 percent of Americans agreed with a statement that the CFPB is “out of control,” while 85 percent of Democrats and 66 percent of Republicans were in favor of the agency. And 81 percent of retirement savers believe it is important to get investment advice from independent advisors who do not have conflicts of interest. The experiences of Elaine and Merlin Toffel and others demonstrate in heartbreaking terms what happens when this is not the case. The Toffels, a retired Illinois couple, sought financial advice at their local bank branch and were ultimately sold expensive financial products even though their situation only called for modest changes to their investments.
And as the devastating consequences of the financial crisis made clear, while many Americans may not care about their neighbor’s fair mortgage or car loan, one family’s purchase of a deceptive or harmful financial product could ultimately force their entire community to pay the price. As the economy continues to recover, it is unthinkable that the country should return to the same loose attitudes toward financial regulation that brought the nation to its knees just a few years ago.
Congress should consider pending appropriations bills on their merits for funding the agencies and programs that its members and the American public care about—not as another opportunity to play Scrooge with families while doling out gifts to the financial industry.