Another Scary Czar

Some Blue Dogs have a better way to protect financial consumers.

The time of year has arrived again when the stores fill up with the masks and costumes of Halloween. Some folks probably think Washington has spent most of the past year creating scary things, from the Stimulus Monster to the Trillion Dollar ObamaCare castle. But wait, there’s more. Moderate Democrats in Congress, small-town bankers and their customers are now trying to protect themselves from yet another Beltway “czar.”

The name of this proposed Frankenstein is the Consumer Financial Protection Agency, or CFPA. Under the current draft in Barney Frank’s Committee on Financial Services, the consumer czar would have the authority to collect fees from financial firms and dictate the “manner, settings and circumstances for the provision of any consumer financial products or services.” The agency could require lenders to submit an unlimited amount of information, as often as the czar demands.

America’s new regulator of lending would have the power to declare products and services “unfair” and “abusive.” Obviously any such designation by a federal agency would create massive liability for services that were legal at the time they were offered. There will be no escape from the lawyers and their pitchforks: The lending czar could prohibit consumers and companies from agreeing to settle their disputes with arbitration instead of litigation. Boo.

The CFPA would get an oversight board made up of the heads of other financial regulatory agencies. But this is merely an apparition: The legislation explicitly states that the board has no executive authority. None. It can only “advise” the director. This absence of effective checks and balances doesn’t exactly fit with the mantra of responsibility in Washington these days.

The nominal point of this effort is to again punish the Wall Street titans for their sins.The good news is that it is dawning on Members of both parties in Congress that the CFPA monster is likely to damage the availability of consumer credit for their constituents. As analyst Meredith Whitney recently wrote in these pages, credit card lines have dropped 25% since last year. Credit lines available via credit cards are a critical source of financing for small businesses.

Is this decline entirely the result of the financial crisis, or are card issuers responding to new Federal Reserve regulations finalized in December? The Fed rules make it harder to change credit terms on existing customers. Congress and the President went further this past spring, enacting new restrictions on the ability of card issuers to raise rates, including on customers who don’t pay on time.

This means that many former customers are simply no longer going to be profitable for banks. Expect more reductions in credit lines as the issuers try to adapt.

Undeniably it would benefit both lenders and borrowers if less credit were the result of stronger underwriting. That would prevent loans destined for default. But the consumer-protection diktats of the CFPA czar in far-off Washington will be explicitly divorced from considerations of bank safety and soundness.

Moderate Democrats, making yet another run to protect their constituents back home, have been circulating an alternative to the Frank proposal. They would immediately assign the existing federal regulators to a council that would ensure consistent rules for serving consumers across all institutions. They would also add state financial and insurance officials, elected by their peers among state regulators, to benefit from their expertise. The council would set broad rules on consumer protection and disclosure to eliminate perceived regulatory gaps.

Mr. Frank wants his committee to throw the switch on his own CFPA bill next week. Does he have the votes? As always, moderate Democrats fear that crossing the Chairman would mean the end of their influence.

Supporting Mr. Frank also has a cost, however. Rural members are hearing from community bankers that their strapped institutions can’t afford new layers of Washington regulation to pay for the sins of Wall Street. In truth, many smaller banks also bet heavily on real estate, but are in no shape to take another hit to profitability.

The President has been giving speeches lately about all he’s done to help the economy. Efforts like the CFPA monster, however, look more and more as if the crisis is being used simply to send more bureaucracy in the direction of an economy that can scarcely afford it.