The recent economic crisis highlighted serious problems within financial sectors of nations across the globe. In the US, these problems have hit home particularly hard, leaving American families with lost wages, mounting debt, and higher unemployment.
And while some responsibility for what's happened certainly lies with those who borrowed money they couldn't afford to pay back in the first place, many argue that this crisis was essentially all made possible by lenders willing to take enormous risks on who they chose to lend to.
Unfortunately, the combination of these two factors created a 'ticking time-bomb', leading to the financial crisis as we know it today. Furthermore, over the past few years there have been increasing calls for government intervention to help prevent some events that led to the crisis from ever reoccurring. The creation of the new Consumer Financial Protection Bureau, or CFPB, is one attempt to answer these calls.
But is another new government agency the real solution to the problem? Only time will tell.
What is the Consumer Financial Protection Bureau?(CFPB)
The CFPB was established as part of the 'Dodd-Frank Wall Street Reform and Consumer Protection Act', which was officially described as "an act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes".
Now that's a mouthful, isn't it?
In short, the CFPB is concerned with regulating consumer finance products and services - things like loans, mortgages and credit cards. While it's part of the Federal Reserve, the CFPB actually operates independently as a bureau in its own right. And yes, that alone scares a lot of people ”mostly Republicans.
Why has the CFPB been established?
Many experts believe the economic crisis we've experienced largely developed because banks and other financial institutions weren't regulated strictly enough. This is not to say that financial institutions deliberately misled customers, but there were certainly lenders offering credit to borrowers who could never realistically be expected to pay it back.
Other lenders may have simply been unaware that their business models weren't sustainable in the long run. Regardless, the CFPB, in theory, will put measures in place that will help prevent lenders and borrowers alike from taking too much risk for their own good.
According to Elizabeth Warren, the Harvard professor appointed by President Obama to get the CFPB up and running, the agency will act as a "new cop on the beat" to make sure consumers never get tricked or trapped again by a financial product they can't clearly understand.
If all goes as planned, Warren expects the CFPB will be fully operational and on the beat by mid 2011.
Will it really help?
According to Warren, it already has. She claims lenders are already beginning to change policies and provide more clarity in their product offerings.
But as with any new government agency, it will probably take quite awhile before we can tell whether the CFPB will really do anything to improve consumer credit in the United States. Not many people saw the financial crisis coming until it began to affect their own wallets. Likewise, we won't really be able to tell if much has changed until we have new data - and the personal experience - to prove it.
