Should We Create a Federal Consumer Financial Protection Agency?

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One of Obama's campaign promises was creating a government funded agency, dubbed the CFPA, which will exist to protect the American people against unfair financial practices. But big banks are dodging the bullet, thus far, as the idea of creating a CFPA is being widely debated.

The CFPA was a Harvard Law professor's idea of creating federal regulation in the private financial world of Wall Street and beyond. This idea then became a promise of then presidential candidate Obama. But two years into Obama's administration and the work left until the CFPA actual becomes a federal agency is immense.

Last month, January 2010, after clearing many political obstacles, the House finally endorsed the creation of the CFPA but the Senate Banking Committee hasn't found the idea of this agency very compelling. Not only does this agency's creation and funding have to clear bipartisan debate, but rather it has become the center of the debate between democrats, republicans and Americans in general. Should the government meddle in private business affairs, even if it is for the good of the masses?

The idea for a new agency with broad powers to police the marketplace for borrowing, including; mortgages, credit cards, payday loans and other forms of consumer credit, came from a 2007 article that Harvard Law professor Elizabeth Warren wrote. The following are exerts from her article:

"Why not be as tough on financial products as the government is on dangerous consumer goods?" she asked.

"Costly debt is a big reason for middle-class woes", she said in an interview."Today, the 50 million families who cannot pay off their credit cards pay more in penalty fees and interest than they spend on clothes,"

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street -- and the mortgage won't even carry a disclosure of that fact to the homeowner."

Warren believes that the CFPA would focus on the lending products, not on the firms that offer them. "That alone", she says, "would set the agency apart from the existing regulatory structure at the various federal agencies that monitor the banking world."

Currently, the House bill that was barely passed, 223-208, would create a new federal agency with the authority to ban financial products found to be abusive or too risky. In recent days, according to Senate sources, they have been discussing alternatives to federal agency as part of an overall compromise.

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