To fix financial system, protect consumers first

THE NEW Consumer Financial Protection Agency proposed by the Obama administration is needed to correct obvious flaws in the financial system and to prevent a repeat of last year’s economic collapse. Predatory marketing of subprime mortgages was a root cause of the current recession. Those toxic loans were bundled in opaque mortgage-backed securities that went hurtling through the global financial system, destroying enormous sums of investor wealth and nearly paralyzing credit markets. Nothing could be more clearly in the national interest than to avoid a recurrence of that financial pathology.

The proposal for a consumer-protection agency is slated for a vote today in Representative Barney Frank’s House Financial Services Committee. The new agency would safeguard investors and the larger economic system as well. Under new rules whose enforcement the agency would supervise, consumers eligible for conventional mortgages would not be steered instead into deceptively packaged subprime mortgages. Banks would be prevented from suddenly jacking up credit card fees and hiding rate increases in pages of fine print. And financial institutions would be pushed to describe their products as clearly, comprehensibly, and concisely as possible.

In their lobbying campaign against the new rules, the big banks and the Chamber of Commerce assert that local merchants may be prevented from providing traditional forms of credit to customers. But the legislation now wending its way through Frank’s committee would apply only to financial institutions, not local merchants. Frank is properly trying to work with community banks and credit unions in drafting legislation that does not impede their ability to do business.

But Frank cannot waver on one point: To prevent the megabanks from getting around any new rules, the legislation must preserve the ability of the states to impose consumer-finance protections of their own. State attorneys general usually do a good job defending the consumer’s interest, while international financial giants have a history of getting their way with the feds.

Now is the time to build fortifications against the next financial bust. And as the country has just learned, protection of investors begins with protection for home buyers and other consumers.