Beginning in 2007, the United States faced the most severe financial crisis since the Great Depression. Millions of Americans saw their home values drop, their savings shrink, their jobs eliminated, and their small businesses lose financing. Credit dried up, and countless consumer loans – many improperly made to begin with – went into default.
Many Americans took on loans that they did not fully understand and could not afford. Although some borrowers knowingly took on too much debt, many Americans who behaved responsibly were also lured into unaffordable loans by misleading promises of low payments. Honest lenders that resisted the pressure to sell complicated products had to compete with their less responsible competitors.
Even those who avoided the temptations of excessively risky credit were caught in its web. Those who never took out an unaffordable mortgage nonetheless saw the values of their homes plummet when neighbors lost homes in foreclosure. Those who used credit cards and home equity lines of credit judiciously saw across-the-board increases in interest rates on credit cards and contraction of outstanding lines of credit. And those who had saved regularly helplessly watched their retirement funds lose significant value and their cities and states cut back on services to make up for their own revenue losses. The costs of irresponsible lending were borne by tens of millions of American families.
In June 2009, President Obama proposed to address failures of consumer protection by establishing a new financial agency to focus directly on consumer protection. This new agency would heighten government accountability by consolidating in one place responsibilities that had been scattered across government. The agency would also have responsibility for supervising providers of consumer financial products and services that had not had regular federal oversight and for enforcing the consumer protection laws with respect to such providers. This agency would protect families from unfair, deceptive, and abusive financial practices. The President urged Congress to give the consumer agency the same accountability and independence that the other banking agencies have and sufficient funding so it could ensure that financial companies would comply with consumer laws.
In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law – often referred to as the Dodd-Frank Act – created the Consumer Financial Protection Bureau (the CFPB). Part of the purpose of creating the Bureau was to increase accountability in government by consolidating consumer financial protection authorities that had existed across seven different federal agencies into one. Consumer financial protection had not been the primary focus of any federal agency, and no agency had effective tools to set the rules for and oversee the whole market. The result was a system without effective rules or consistent enforcement. The results can be seen, both in the 2008 financial crisis and in its aftermath.
Instead of important consumer protection powers being scattered across the federal government, now a single entity will have the oversight authority to make sure consumer financial markets work for all of us.
