Consumers need more financial protection

These days, it seems almost everyone has a Bad Bank Story.

In fact, complaints about banks jumped 42 percent last year, the most for any industry, according to the Better Business Bureau.

That's why there has been a big push for a new consumer financial protection agency. That's also why Congress should go ahead and create the agency, which is called for in financial reform bills now in both the House and Senate.

If you're looking for a Bad Bank Stories, you don't have to look far.

�People with debit cards have seen banks purposely process transactions from largest to smallest and ahead of deposits so as to rake in overdraft fees of up to $39 per transaction. A person who makes a deposit and thinks there is a sufficient balance could easily wind up owing hundreds of dollars.

�Prepaid debit cards, typically used by low-income people, can carry more than two dozen fees, including stiff "activation fees," additional charges for every transaction and monthly maintenance and inactivity fees.

�Banks have started behaving like mob loan sharks, offering "early access" withdrawals from checking accounts even before customers put the money in. The exorbitant interest rates make payday loans look like a bargain.

No wonder 36 percent of all bank customers say their banks mistreated them or someone they knew in the last two years, according to a December survey by AlixPartners, a global business advisory firm.

Some reforms already have been made. Last year, President Obama signed the Credit Card Accountability, Responsibility and Disclosure Act, which will go into effect in July. It will prohibit forms of exploitation, such as allowing debit card overdrafts without the consumer's approval and manipulating overdraft penalties to maximize bank profits.

Since Obama signed that law, however, new bank fees have proliferated. And the whole recent history of the finance industry illustrates the need for a new agency that would regulate mortgages, credit cards, debit cards, installment loans and other products issued by financial institutions.

The House has approved a bill that would create an independent consumer agency. The Senate Banking Committee last month approved a similar bill, but the Senate would make the new agency an arm of the Federal Reserve.

In a meeting Monday with the Chicago Sun-Times editorial board, Sen. Dick Durbin said the proposed consumer agency is the "most contentious" part of the Obama administration's financial overhaul plans, which together would constitute the biggest reforms for the industry since the New Deal.

Banks "just can't stand the notion that somebody is going to have some oversight on consumer protection," Durbin said.

The strongest argument against the new agency is that the Federal Reserve and other regulatory agencies already possess much of the authority needed to protect consumers. But their inaction on consumer issues in recent years shows their focus is elsewhere.

A second concern is that financial institutions would be handcuffed in their ability to offer even beneficial new products, said Professor Robert S. Chirinko, interim head of the finance department at the University of Illinois at Chicago.

"Do you want people to have a more restrictive set of products . . . vs. more innovative products?" Chirinko said. "That is the tradeoff."

Also, there is the problem of what academics refer to as the "regulatory dialectic": Financial institutions will have an incentive to find alternative routes to their goals despite new regulations.

But at this newspaper, we've heard too many stories from Chicago area residents whose lives were ruined because, for example, they signed mortgages they didn't understand. A consumer financial protection agency would likely impose sensible rules to make sure ordinary folks are fully informed before signing on the bottom line.

Then, maybe, we'll have a few more Good Bank Stories to tell.

Read the Sun-Times Commentary blog BackTalk at suntimes.com.