I’ve just been informed by people in Washington DC that there is a newly proposed amendment to the Consumer Financial Protection Agency, an amendment that I find promising. Here is a first draft:
Today we will offer the “Financial Autopsy” amendment. The Grayson/Clay/Miller amendment is essential to attacking the root problem of consumer bankruptcy and foreclosure because it requires the CFPA to do a financial audit of products that have caused the highest rates of bankruptcy and foreclosure annually. Not later than March 31st of each calendar year, the CFPA will list these anti-consumer products, submit their conclusions on why these products “fail” consumers, the companies and employees that underwrote these products, and authorizes the CFPA to take action to restrict these products.
Financial Autopsy Amendment:
- Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.
- Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.
- Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections
- The bottom line is to highlight destructive products based on if they are making people “broke”. Thank you for your consideration, we hope you will join us in supporting this amendment.
Alan Grayson Wm. Lacy Clay Brad Miller
A few thoughts:
- The CDC has a response team for when it finds cancer clusters. I like the idea of the CFPA having a similar response team, that can be called in for expert opinion in the case of foreclosure and bankruptcy clusters. A team of forensic accountants and financial experts who can be called in by members of Congress, or as a result of their own statistical samplings, to give opinions on what is going on on the ground in a member’s district when it comes to the end result of financial innovations. Financial detectives, if you will, who can shift through all the noise one finds with dealing with consumer finances to see if there’s any signal that is the result of changing products and options available to consumers.
- Some readers may ask: Can’t the Federal Reserve do this? Let’s look at a previous time the Federal Reserve tried to do this. Here’s the transcript of “Morning Session of Public Hearing on Home Equity Lending, July 27, 2000.” There were worries among people in North Carolina that there was a problem with subprime loans and home equity lending causes bankruptcies and foreclosures. So what did the Federal Reserve do? They called up all the local subprime lenders and some community organizers who brought this problem public and asked the subprime lenders if they were doing anything wrong. You might be shocked to learn that, after some deep reflection, the subprime lenders found that they were not. Here’s a representative exchange between the Fed Chair and Martin Eakes, community financial lending organzier (later of the CRL):
GOVERNOR GRAMLICH: “…The last few years have seen enormous growth in subprime lending. …This is mainly, surely, a good thing in the sense that this growth in the subprime lending market has brought credit to low and moderate income households…But there are also seemingly some abuses.
There have been a series of anecdotes, a series of TV programs mentioning some of these abuses, there has been a rise in the foreclosure rate, and these adverse statistics have attracted our attention….We want to keep a relatively analytical focus and focus on specific things that the Fed might do, trying to make sure that, in technical talk, the benefits of what we do outweigh the costs….If predatory lending is as significant a problem as some people are alleging….”
MARTIN EAKES: “[later]…The first point I want to make is to say that predatory lending or loans that have abusive characteristics are not anecdotal as the Federal Reserve notice and your opening comments mentioned….”
Note the setup from the Fed Governor: “seemingly some”, “anecdotes”, “TV”, “as some people are alleging.” When Eakes replies that there were statistical efforts carried out, you can practically hear the crickets chirping in the silence. Now imagine if there was an independent congressional team, dedicated to investigating the consumer angle instead of bank safety and soundness, who could have testified here after doing ground work for some time, and could give expert opinion on the dynamics at play in this area. It would have changed the whole approach that could have been taken at this meeting.
- This is going to have, by nature, an adversial relationship with financial institutions. No detective has gotten anywhere in a murder mystery by yelling “Hey! Did anyone kill this guy? No? Must be natural causes.” The can be limited to some degree – smart banks who know they are not using tricks or traps on consumers would have incentives to co-operate with any autopsy investigations.
- This strikes a good balance on the the need we have for new financial innovation; it lets more in on the front end, with the idea of looking at the results at the back end. It’s a conceptual focus that is less focused on gatekeeping and more on detective results of what has happened as a result of the newest innovations.
All in all, a promising front for consumer financial reform. What do you think?