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Proposed Consumer Protection Agency Gets Mixed Reviews

The Obama administration has proposed a Consumer Financial Protection Agency (CFPA) that would regulate the fees, penalties, and interest rates for consumer products such as credit cards and mortgages. The administration believes this new agency could enforce disclosure, but do American consumers really need a new layer of regulation?

Opponents like Reuters Money & Politics columnist James Pethokoukis say no, arguing there are many negative externalities related to the credit regulation that comes with the proposal. Under this "extremely elitist" plan, the cost of credit will rise and people will have to pay more for mortgages than they should, Pethokoukis said.

"This bill treats people as if disclosure is not enough, that people [can't be educated]. Even if you have great disclosure requirements (if you're a financial institution), you can still be sued if people still end up in the wrong investment," Pethokoukis said.

One group may end up very happy if the proposal is approved. Pethokoukis said this will be a gold mine for attorneys.

In a nutshell, the administration's proposal would permit educated consumers to utilize any financial service they want while restricting the number of goods available to the average consumer.

That's good news according to Connecticut Attorney General Richard Blumenthal, who thinks the CFPA could compound existing financial service regulators and authorities so they can be more effective for the consumer.

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"Neither the FTC nor any of the other federal agencies has really been an effective watchdog," Blumenthal told CNBC. "And what we need here, as much as anything else, is full disclosure transparency, intelligible and understandable pitches and promotions, and documents for consumers so they know what they are committing to do."

The present financial protection system has not been working, according to Blumenthal. The new regulatory agency would have the authority over banks and be permitted to develop criterion for all consumer financial services and goods.

The Senate Banking Committee holds a big hearing Tuesday to debate the Consumer Financial Protection Agency. Consumer protection in the US normally concentrates on disclosure. The assumption has been that with sufficient disclosure, all consumers could make rational conclusions about goods and services presented to them.