What the Government's New Consumer Watchdog Means for You - Page 3 of 4

Richard Cordray, former attorney general of Ohio, nominated by President Obama to lead the CFPB.

If it Smells Like a Bank…

Many companies that don’t look like banks function like banks, such as payday lenders and private education lenders. For example, some private universities have come under fire in recent years for fraudulent marketing practices, and for the schools’ failure to help students graduate and find jobs.

Many lending companies specialize in making loans to students at private universities, and these loans are often made with variable interest rates that soar to as high as 18%, according to a report by the U.S. Public Interest Research Group.

Under the Dodd-Frank Act, the CFPB is to create a private education loans ombudsman, charged with collecting and studying complaints from borrowers about such loans and identifying patterns of abuse. Over time, that could lead to lower interest rates and cheaper loans, which could help more students graduate, some consumer advocates say.

“The agency has authority over all private student lenders, including both banks and non-banks,” according to a report by the Project on Student Debt. “Consumer advocates have called on the CFPB to require mandatory school certification along with other important consumer protections for private loan borrowers.”

[Featured Product: Research and Compare Credit Monitoring Options on Credit.com]

Problems also exist with payday lenders, many consumer advocates say. While payday lenders advertise their loans as ways to deal with occasional financial emergencies, their high fees often trap consumers in a cycle of debt, Calhoun says, often leading to credit card delinquencies and bankruptcies.

The new consumer protection bureau could play a major role in reducing those fees and helping consumers get lower-cost loans from banks that, unlike payday lenders, are regulated by federal law.

“The CFPB will play a critical rule in ensuring a fair, equitable, and transparent consumer marketplace for credit in general, including payday loans,” says Calhoun.

Fixing System-Wide Problems

More broadly, all types of consumer lending still suffer from systemic discrimination against ethnic and racial minorities, says the NAACP’s Shelton. Predatory and payday lenders are far more likely to target African-American and Latino neighborhoods, and race plays a role in dragging down the credit scores of non-white consumers even after legitimate credit issues like income and debts are excluded, Shelton says.

Since discrimination happens across all types of credit, Shelton says, the centralization of consumer protection functions from seven different federal agencies into the CFPB is a big step forward.

“In short, a robust, functioning CFPB will work through rule making, enforcement, and research to ensure a more fair and equitable financial playing field,” Shelton says.

The CFPB has also established an Office of Military Affairs, led by Holly Petraeus, wife of General David Petraeus, formerly head of our forces in Iraq and Afghanistan, and now head of the CIA. This office aims to provide protection and support for military families from the payday and other predatory lenders that Ms. Petraeus observes often set up shop right outside of military bases. Military families, particularly when a member of that family is deployed, are particularly susceptible to illegal financial practices, including predatory mortgages. The CFPB has announced it will partner with the Judge Advocate General’s (JAG) of all five military branches to identify and prosecute financial scams targeted at military families.

[Free Tool: Obtain your Identity Risk Score from Credit.com]

Or, Making the System Worse

Conservative activists tend to agree with consumer advocates on at least one thing: Few consumers have ever heard of the Consumer Financial Protection Bureau.

“I agree, I don’t think most people know about it,” says David John of the Heritage Foundation.

Unlike Democrats and consumer advocates, many Republican leaders and banking industry representatives believe the bureau’s effects on typical consumers will be mostly harmful. Despite Democratic assurances that the bureau already has significant checks on its powers, “this agency that will have unprecedented reach and control over individual consumer decisions—but an unprecedented lack of oversight and accountability,” Senate Minority Leader Mitch McConnell (R-KY) said in a statement emailed to Credit.com.

Pay More, Get Less (cont.) »

Credit.com’s Extensive Coverage of the CFPB: