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Monday, March 1, 2010

The CFPA is Fool's Gold

Paul Krugman used his opinion space to push for broad and tough financial reform with its center piece being the Consumer Financial Protection Agency (CFPA). This is the center piece of President Obama's new financial regulation and Krugman presents the benefits of the CFPA like this.

There’s no question that consumers need much better protection. The late Edward Gramlich — a Federal Reserve official who tried in vain to get Alan Greenspan to act against predatory lending — summarized the case perfectly back in 2007: “Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself — the least sophisticated borrowers are probably duped into taking these products.”

With all due respect to both Krugman and Greenspan, if they can't answer this question, they should cede from contributing to any debate on financial regulation. To claim that the least sophisticated get the most risky loans because they are "duped" is simply populist fantasy. The least sophisticated among us are also those with the weakest credit score, least in assets, and lowest in income. The reason they got the riskiest loans is because that's the loan they usually qualified for.

Mortgage professionals could make just as much money in prime loans as sub prime. I'm not saying it didn't happen but the overwhelming majority of the time the unsophisticated borrowers were put into risky loans because they simply didn't qualify for the safe loans.

The CFPA would be yet another regulator in an industry that is already hyper regulated. Paul Krugman claims there aren't enough consumer protections but anyone that has ever closed on a home loan knows there's too many protections. The hundred or so pages that everyone signs are the supposed protections.

There continues to be a disconnect between those that want more regulations and reality. Is there anyone that thinks we don't sign enough paperwork in conjunction with getting a home loan? Yet, the Krugman's of the world want more regulations. What exactly does more regulation mean if not more paperwork? Banks and mortgages are already under the perview of at least ten different regulators on the state and federal level. The answer for some is to add another regulator.

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