M: Business 3rd Edition by O. C. Ferrell, Geoffrey Hirt, Linda Ferrell

Exercise 2

Financial products can be hard to comprehend. This inability to understand the risks of financial products and lending practices contributed to the 2008–2009 financial meltdown. To try to prevent similar problems in the future, the U.S. government has formed the Consumer Financial Protection Bureau (CFPB).

The CFPB became a reality as a component of the Dodd-Frank Act signed into law in July 2010. Established by Harvard Law Professor Elizabeth Warren, the bureau is designed to mimic the independent Consumer Product Safety Commission, which aims to keep unsafe consumer products out of the hands of individuals. Instead of consumer products, however, the CFPB’s authority involves financial products and services. The CFPB has rule-making authority and supervisory power over the credit market. Its goal is to make financial products and services easy to understand in terms of costs, risks, and product/service comparisons. It also aims to curtail unfair lending and credit card practices, to check the safety of financial products before they are launched into the market, and to require changes to those financial products deemed to be too“dangerous” or risky. According to Warren, the CFPB works proactively to supervise lenders by regularly checking their books and working together with both the attorneys general and the American people. When necessary, the CFPB will step in to enforce new rules on those not complying.

Although the CFPB sounds like a good idea, critics point out potential problems. Banks are worried that the CFPB might increase costs and inhibit their decisionmaking authority to serve the market effectively. Warren and her team admit the bureau is merely in the beginning stages of functionality, but over time they believe it will have a strong positive impact on lenders and borrowers throughout the credit world.

Why was it considered necessary to create the Consumer Financial Protection Bureau?

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While it is important for all of us to act responsibly in dealing with funds, not every financial product or service is easy to understand completely. There are a number of financial products or services that are complex and can be overwhelming. To help financially vulnerable American consumers, federal government created CFPB, an avenue to protect American consumers from unfair financial institutions.