Earlier this fall we had some high-stakes combat in Washington over passing the budget and raising the debt ceiling. On both issues President Barack Obama and the Republican Congress reached compromises that resolved the immediate standoff. However, these compromises still required specific appropriation bills in several major areas of the budget. It turns out that the passage of these bills is providing more grounds for conflict.
While there is agreement on the amount of money to be included in these bills, the contention stems from Republican plans to include extraneous issues, referred to as riders, as provisions of the appropriation bills. These riders can cover a vast range of topics. We are virtually certain to see riders that would eliminate funding for Planned Parenthood as well as ones that call for the repeal of the Affordable Care Act. Obama will certainly veto these bills, but doing so would prevent the commitment of a stream of funding and create a risk of shutdowns of some departments and agencies.
Financial regulation is one of the areas drawing considerable attention from Republicans and a likely topic of one or more riders. In particular, the Republicans are likely to include riders weakening the Consumer Financial Protection Bureau (CFPB) and blocking a Labor Department regulation on financial advisers.
The Republicans’ big problem with the CFPB is that it seems to be doing its job. The bureau was set up first and foremost to prevent the sort of abusive lending that we saw in the peak years of the housing bubble. Millions of people bought or refinanced homes with mortgages that had interest rates that reset to higher levels. While they may have been able to afford the mortgage with the initial rate, many found themselves unable to meet payments after their rate reset. This was a major factor in many people’s losing their homes after the bubble burst.
The CFPB has sought to impose higher standards in the mortgage industry and other sectors of consumer finance, ensuring the people understand the terms and the risks involved when they take out a loan. The effectiveness of the CFPB is perhaps best demonstrated by one area of consumer finance where it was prohibited from playing a role: car loans.
There have been numerous news accounts on the proliferation of subprime loans in the auto industry. In a smaller scale repeat of the subprime disaster in the housing market, millions of people are finding themselves unable to meet the terms of their car loans. They often end up losing a car that is essential for their job and transportation needs. While this reality might reasonably lead Congress to extend the authority of the CFPB to cover auto loans, instead we are likely to see riders cutting back the bureau’s budget.
The story with the Labor Department’s regulation on financial advisers is similar. Many financial advisers push stocks or other financial products to their customers because they get a commission based on their sales. This is disturbing both because people might not be well situated to evaluate the risks and benefits associated with various financial assets and also because many people assume that a financial adviser is working in their interest.
The proposed Labor Department regulation would require that financial advisers work in the interest of their customers and give advice based on what they believe to be in their customers’ interest, not influenced by financial incentives to push particular stocks, mutual funds or other financial assets.
While the stake for the financial industry in opposing the CFPB and the Labor Department regulation is clear, it is interesting to consider the argument they put forward. It essentially amounts to saying that we should trust people to look out for themselves and the government need not get involved.
Believing there is a role for government in regulating consumer finance doesn’t require thinking that people are stupid. Most people are not experts in finance or reading complex contracts. They have lives.
It isn’t surprising that smart lawyers can write contracts that deceive consumers about the terms to which they are committing themselves. Nor is it hard to believe that a financial adviser can deceive a customer who spends little time studying financial instruments.
The question is what we tell the public about this. We can say people should understand that to navigate the world of finance is to sail in dangerous waters and therefore spend the time necessary to protect themselves from scams. Or we can say it makes sense for the government to make the waters safer. The CFPB and the regulation of financial advisers are efforts to do the latter. The point is to remove some of the pitfalls that we know have been enormously harmful to tens of millions of families.
In fact, there is a very strong argument for this regulation from the standpoint of promoting productivity and growth. In addition to preventing consumers from having to waste their time studying finance, these regulations remove the incentive to create deceptive products. Would we rather have smart, talented people designing better software and health care technology or figuring out ways to deceive people on car loans and mortgages? By foreclosing the deception option, financial regulation should be pushing people to devote their talents to productive work.
It is of course understandable that there are differences of opinion on such issues. If the Republicans want to have a public debate on allowing the financial industry to pursue deceptive practices, they can do that with freestanding bills. When Obama vetoes the bills, they will have the ammunition they need to make this issue play a central role in the 2016 elections. Then the public will get to decide.