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Banks haven't proved that consumers can trust them

You'd think banks would be able to succeed by treating customers with integrity. But left to their own devices, they do the opposite. That's why we need a Consumer Financial Protection Agency.

June 21, 2009|DAVID LAZARUS

Denial, noun: An unconscious defense mechanism characterized by refusal to acknowledge painful realities, thoughts or feelings.

-- The American Heritage Medical Dictionary

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The banking industry wasted no time last week declaring its opposition to President Obama's proposal for a regulatory agency that would protect consumers from rapacious lending practices.

While acknowledging that "regulatory reform is badly needed," Edward Yingling, president of the American Bankers Assn., said the new agency would have "powers to mandate loans and services that go well beyond consumer protection."

The Financial Services Roundtable said it applauded "modernizing regulation of the financial services industry." But it too opposes the new agency "because it will not adequately serve the best interests of consumers and their financial institutions."

The Consumer Bankers Assn. chimed in by saying the proposed agency "would create a maze of regulations suppressing creativity and product innovation."

These guys just don't get it.

The reason Obama wants to create a Consumer Financial Protection Agency isn't that he's hell-bent on imposing his will on banks. It's that banks have consistently proved themselves unworthy of customers' trust.

From runaway credit card interest rates to mortgages that turn into one-way trips to foreclosure, lenders have repeatedly demonstrated their inability to deal with customers fairly and responsibly.

Instead, they place their own interests ahead of all other considerations, and in so doing expose frequently unsophisticated consumers to enormous risk and financial ruin.

The banks have only themselves to blame for why a Consumer Financial Protection Agency is needed.

"They wrecked the system," said Gail Hillebrand, senior attorney with Consumers Union. "What they're saying is that they want to keep doing business as usual. But business as usual has failed us."

In announcing measures to improve oversight of financial markets, Obama said that "a culture of irresponsibility" had taken root on Wall Street and elsewhere.

Acknowledging that many people took out loans they couldn't afford, he said "there were also millions of Americans who signed contracts they didn't always understand offered by lenders who didn't always tell the truth."

The Consumer Financial Protection Agency would be charged with ending deceptive practices and ensuring that information provided by lenders is accurate and easy to understand.

What's truly shocking is that this sort of thing has to be legislated. You'd think banks would be able to compete and succeed by treating customers with integrity. But left to their own devices, they do just the opposite.

"Companies compete not by offering better products but more complicated ones, with more fine print and more hidden terms," Obama said.

So like naughty children, they get a time out and some new rules to follow.

Wayne Abernathy, a spokesman for the American Bankers Assn., told me his industry has gotten a bum rap. Major lenders aren't to blame for problems making consumers' lives miserable, he said.

"I can't deny that's the impression out there," Abernathy said. "But it's not us."

He said the real culprits were smaller financial institutions operating primarily at the state level that were reckless in their lending practices.

"When their products blow up, we get tarnished," Abernathy said.

Well, no.

At least not when you consider that American Express, Bank of America, Capital One, Citigroup, Discover and JPMorgan Chase account for about 80% of the credit card industry.

Or when you consider that the top four mortgage lenders as of the first quarter of the year were Wells Fargo, BofA, Chase and Citi. Together they accounted for more than half of all residential loans originating in the period.

Obama is targeting the big boys because all roads lead to their doors. And it could be argued that if anyone should know better, they should.

It could also be argued that these guys should have nothing to fear from a Consumer Financial Protection Agency if, as they say, their business is already on the up and up. What's a little accountability among friends?

Banks say a new regulatory agency would increase their costs. Since when has treating people respectfully added to expenses? They say it will stifle creativity and innovation. That just sounds like an excuse for laziness.

The simple fact is that banks have lost consumers' trust and the onus is on them to earn it back. And while they're doing so, government regulators will be watching to make sure everyone plays nicely.

That's why we need a Consumer Financial Protection Agency.

That's why the bankers need to wake up to reality.

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David Lazarus' columns runs Wednesdays and Sundays.

Send your tips or feedback to david.lazarus@latimes.com.

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latimes.com/lazarus/agency

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