Explosion of "Fringe Financial Services" Underscores Need for Strong Consumer Protection Agency

With the nation slowly recovering from the worst economic sucker punch in more than 50 years, consumers are finding they need to be ever more vigilant in protecting themselves from businesses that may not have their best interest at heart.

Be it in banking, credit services, utilities, insurance, or any number of other industries, ethically questionable practices -- and the legal loopholes that make them possible -- continue to anger and frustrate Americans on both sides of the political divide.

As the Obama administration works with Congress to enact sweeping financial regulatory reform, consumer advocates say now is the time to put in place essential protections to keep the most vulnerable populations from being further victimized by unscrupulous lenders.

Yet pro-business legislators seem intent on ensuring that regulatory reform goes the way of healthcare reform, becoming gradually watered down until it no longer resembles reform at all. At the moment their efforts are being directed largely at trimming the claws of a proposed Consumer Financial Protection Agency (CFPA). The fate of the agency remains in limbo as a standoff over its creation among top lawmakers in the Senate Banking Committee intensifies.

The financial reform bill that passed the House in December included a CFPA with the power to monitor the regulatory compliance of banks, credit unions, mortgage brokers and other lenders; but Republicans, with the backing of the U.S. Chamber of Commerce and the financial services industry, are intent on keeping the agency out of the Senate version.

Elizabeth Warren, the chairwoman in charge of overseeing federal bailout funds, says a strong consumer protection agency is a vital weapon in what she calls a "David vs. Goliath fight" between consumers and Big Finance.

"The fate of the Consumer Financial Protection Agency will be the best way to follow the [reform] story moving forward because consumer products were the most abusive and because the CFPA has real muscle to stop those abuses," Warren said, in a January 19 open letter.

Consumer advocates agree, saying that such an agency is an essential first step in protecting the city's poor from predatory financial services.

"I'm hopeful that it's going to happen but I'm discouraged it's taken as long as it has," said Cathy Carr, executive director of Consumer Legal Services of Philadelphia, which offers civil legal services for free to Philadelphia's low-income communities. "I think it's kind of surprising that we're this far into an admittedly devastating mortgage crisis and there still has yet to be legislation to prevent this kind of fraud from happening again."

Carr says that while the methods and tactics may change, poor and minority communities are disproportionately at risk of falling prey to predatory financial service schemes that almost always do more harm than good.

"We've done a lot of work over the years and really tried to get regulators to take an aggressive position to protect people [but] the one thing about American capitalism is there always seems to be someone out there trying to scam another buck out of somebody," Carr said.

Among the pitfalls that low-income consumers fall into, Carr says some of the more common today include education services that offer high-interest loans to people hoping to learn computer, driving, beauty, or other skills.

"People take out loans, often federal loans, and really get nothing for the money and end up with no real advantage for the courses," she said.

The group has also aggressively taken on the payday loan industry. Payday loans are very short-term loans, typically ranging from $100 to $1,000, with extremely high annual percentage rates. During 2008, Payday lenders in the U.S. extended 120 million loans with a total value of $42.1 billion. The fees associated with these advances amounted to $7.3 billion according to Financial Service Centers of America, the trade association representing the payday lending industry.