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Creating massive consumer regulatory bureaucracy is bad idea

The Obama Administration wants to create a giant new Consumer Financial Protection Agency to “protect” you from bad lenders. Oklahoma bankers believe “protecting consumers” is a great idea. In fact, it's something our state's traditional community banks have been doing for more than 30 years!

But this new agency, to be headed by a single federal bureaucrat, goes way beyond what the Administration and its consumer and community advocates claim. In fact, if enacted it will hurt the very people they say they're trying to protect.

What's even more aggravating is this proposed new agency purports to go after the people who caused the financial collapse and economic meltdown in 2008, but it doesn't. In fact, it exempts most of them from any oversight by the new agency: investment bankers, speculative brokers who packaged lousy loans and sold them to buyers around the world, real estate brokers who helped them pull off these sham deals, and anyone else that's theoretically regulated by the Securities and Exchange Commission or the Commodities Futures Trading Commission.

When it comes to balancing your personal checkbook, this enormous new federal bureaucracy will substitute its financial preferences for yours and micro-manage every aspect of the relationship between you and your financial institution of choice. It replaces individual choice and free market competition with central government direction and controls.

1. The proposed agency will have bad consequences for consumers.

One of the primary targets of this new agency is “overdraft” protection programs, as if they had something to do with the current financial collapse. But in an effort to “protect” you the proposal will force bankers to eliminate these overdraft protection programs and return checks when you don't have enough money in your account to pay them.

Here's what we mean: If you write a check at the grocery store, and there's not enough money in your account to cover it, under Oklahoma law that could be a crime. When this happens, the check must be handled as an “exception” to the normal (automatic) payments process. It's rejected by the system and must be processed by an individual, which adds extra costs for you.

Here's what the new system will mean for you as a consumer if you accidently overdraw your account:

  • Your check will be returned, and your financial institution will charge you a fee for hand-processing the check. Normally such a non-sufficient funds (NSF) fee is in the range of $20-25, depending on the institution. This NSF fee is separate from an “overdraft protection” fee that is the target of this legislation.
  • Your check will be routed back to the store where it was written by that store's financial institution, and the store also incurs a charge from its bank, normally in the $20-25 range. The local store deposited your check in good faith and received credit for it. That credit will now have to be reversed and your returned check is processed by hand once again as an “exception” to the normal process.
  • So far you this means you now face two separate charges – one charged by your bank for writing a check on your account without enough money to cover it, and one that's charged to the merchant by its bank to whom you wrote the check.
  • In many cases the merchant adds an amount to the fee charged by its bank for the inconvenience of having to deal with your returned check. That fee can be in the $10-20 range.
  • Now you will be required to pay the store's bank charge ($20-25) plus the store's separate charge ($10-20) in addition to the amount of the check which you still owe.
  • Some merchants “post” returned checks for every other customer to see until they are paid. That's embarrassing.
  • Some merchants simply don't allow customers to pay by check if they have any history of having them returned. That's inconvenient, as well as embarrassing.
  • In some jurisdictions in Oklahoma, the merchant sends the returned check to the local District Attorney for prosecution or collection. When that happens the customer receives a letter from the DA in which the issue of “prosecution” is mentioned. The DA demands payment of the face value of the check as well as the costs incurred and charged by the merchant, plus court costs of $75 or more. And the total is to be paid within five days or else the court costs are increased significantly.
  • Coincidentally, more than 50 percent of the women currently in jail in Oklahoma County are there because they wrote a bad check.

Now, all of a sudden, because you made a mistake and wrote a check when there wasn't enough money in your account to cover it, you're looking at three separate charges, plus court costs, plus the face value of the check.

Check's face value:       $100
Your Bank's NSF Fee:       25
Merchant Bank's Fee:       25
Merchant Handling Fee:    10
Court costs:                       75

Total You Owe to DA:     $235
                    Payable in 5 days

That's what this proposal means to consumers. It won't save you money – it will cost you money. It will also cause you a great deal of inconvenience, embarrassment and frustration.

Traditional Oklahoma Banks offer overdraft protection programs to help their customers manage through mistakes or tough times, as may be necessary. When a customer takes advantage of such programs, he or she is using the bank's money for his or her own purposes.

Banks encourage their customers not to write checks for which they don't have the money to cover them. Like a speeding ticket, an overdraft charge which is incurred when a NSF check is paid, is intended to do at least two things: (1) provide a service to the customers, saving him or her additional costs, embarrassment and potential prosecution; and (2) operate in a way to deter future instances of writing “bad” checks.

This is just one example of a lousy idea going in the wrong direction. There's more:

2. The proposed agency will result in a huge new bureaucracy for which you and other consumers will ultimately pay.

  • Banks have been subjected to rules and regulations governing their customer relationships for more than 30 years. The system has worked well for traditional community banks in Oklahoma.
  • This new proposal changes all of that and gives the new agency primary authority to enforce (or eliminate) existing rules and exclusive authority to write new rules under 16 separate pre-existing federal statutes.
  • The proposal gives the agency the power to examine and require reports from a broad variety of businesses that offer financial products or services – whether they are inside or outside the jurisdiction of the federal banking agencies.
  • The costs for funding this giant new federal bureaucracy to oversee banks and many other businesses that offer financial products will be enormous.
    • Estimates are that it will cost billions of dollars every year.
    • Those costs will come from fees imposed on banks and other financial entities.
    • Those costs will be passed on to you and your fellow consumers; i.e.
    • Consumers will end up paying for this huge new agency, which will cost several billions of dollars each year.

3. The proposed agency does not address the root causes of the current financial problems.

  • The proposal ignores the real causes of the financial meltdown – entities that fell in the supervisory “cracks” of the existing regulatory structure.
    • Real estate mortgage brokers and agents that didn't have to play by the same rules as lenders, for examples, are exempt from its provisions.
    • So are securities firms, who took worthless mortgages and buried them in securities that were parsed and sold around the world.
  • The proposal wants to rely more heavily on the states to enforce the new laws, and to create laws that are even more problematic.
    • But the states have always had the authority to more stringently regulate non-bank lenders – the ones that were the primary contributors to the crisis.
    • States simply failed to do their job and properly rein in those entities making bad loans that no bank, thrift or credit union would have made because repayment was “someone else's problem”.
  • The Bernie Madoff-causing SEC is left intact and the products and services offered by investment houses are not brought within the agency's jurisdiction.
  • Insurance products are exempted from this new agency, as if consumers never had any problems with their insurance coverage or collecting on a claim.

4. The government should focus on strengthening and improving the extensive system of existing regulations and ensure strong oversight of lightly supervised non-bank lenders and their intermediaries.




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