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Sunday, July 17, 2011

Protect Borrowers, Not Predatory Lenders




President Obama will appoint former Ohio Attorney General Richard Cordray to head the new Consumer Financial Protection Bureau. Created by the Dodd-Frank financial regulation law, the bureau will begin monitoring the 111 largest banks in the U.S. on July 21st, 2011. The goal of this agency will be to eliminate the predatory lending practices that contributed greatly to the mortgage crisis and ultimately the recession. Under the Bureau, the largest banks in the country (those with assets over $100 billion) will be subject to full-time supervision. Banks with assets between $10 billion and $100 Billion will face “audits” by the bureau every two years. Banks with less than $10 billion will not be subject to supervision.

The idea behind the Consumer Financial Protection Bureau came from Harvard professor & Obama appointee Elizabeth Warren, 62. Warren is a top national expert in bankruptcy law and has long been an outspoken critic of banks and financial lenders for engaging in predatory practices that are damaging to consumers and ultimately the economy. Back in 2007, Warren was meeting regularly with the nation’s largest credit card companies in an effort to convince them to adhere to self-imposed practices that would reduced confusing fine print and encourage clearly articulating any risks to potential borrowers. Her idea was to create credit card accounts that were not designed to trap borrowers into as much long-term debt as possible. In exchange for their good practices, the company would receive a “seal-of-approval” from the government labeling their credit card a “clean card”. She quickly realized however that her idea of a new “clean-card” was not something credit card companies would impose on themselves. After one of these aforementioned meetings Ms. Warren says she was told flat out by a banker “We recognize that we have an unsustainable model, and it cannot work forever. If we told people how much these things cost, they wouldn’t use them.”



In essence, Card Company “A” would not and could not to take up Warren’s idea of a “clean-card” if credit card companies “B” “C” and “D” did not. If credit card company “A” came out and admitted that his card was actually a 15% interest rate while competitors “B” “C” and “D” still advertised and mascaraed that theirs were only 3%, Company “A” would quickly see its borrowers abandon it for the seemingly cheaper options. If regulation of the lending industry was to happen it could only happen if it were industry wide. And the only way to get an entire industry to reform itself is through law, Federal Law.



The creation of the bureau is of course subject to the the age-old arguments about the role of our government, the size of our government, and the effects of our government's regulation on the economy. As we now know, the largest banks and financial institutions caused the lending crisis that led to one of the worst economic crises in U.S. and World history. Then, they accepted public money so that they could stay in business while they were simultaneously raising interest rates on our credit cards & loans and foreclosing on our houses. Oh, and by they way, the financial sector made record profits in 2010. I urge everyone to remember that the big scary government created this agency for a reason. Banks and financial institutions have become so big, powerful, and influential that it is no longer in their best financial interests to care about the economic well being of their borrowers. For anyone critical of the creation of this bureau: don’t be mad at the public sector for trying to defend the American People, be mad at the private sector for ripping us off. Not only are they ripping us off, but they're breaking the law to do it. It would be nice if we lived in a world were mega banks didn’t engage in every possible legal loop-hole, tax loop-hole, accounting gimmick and lobbying technique they can to maximize and protect their profits (at our expense). But we don’t. In essence, the government wouldn’t have to police the financial industry if it wasn’t more concerned with making a profit than ripping off consumers and tanking the economy. If we can spend $700 billion protecting banks from failing due to their own poor business practices, it's high time we gave them some stricter rules to follow.


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