This New Federal Agency Will Police Financial Institutions

The Consumer Financial Protection Bureau is now a federal government agency created to police every type of transaction between financial institutions (NYSE:XLF) and consumers.

The controversial new agency, still hotly opposed by most Republican lawmakers, will oversee credit cards, mortgages, and other financial products that have the potential to defraud consumers or hurt economic recovery efforts.

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While financial institutions aren’t happy with the added scrutiny, nor are their representatives in Congress, the advocacy group Consumers Union released the result of a poll showing that 74% of those responding supported the new bureau. In fact, some believe that the agency’s initial staff of 400 isn’t nearly big enough to handle the flood of consumer reports they are bound to receive after years of regulatory neglect of the industry.

The agency will heavily rely on consumers to report suspicious activity, with roughly a quarter of its budget going toward investigating those complaints. The agency will use new technology to analyze complaints and is developing a high-tech infrastructure that will process them and then address them to financial institutions to take action.

Today the consumer response center for credit card problems opened to the public, giving people the option to either call in or fill out a complaint online.

Consumers shouldn’t expect immediate solutions as the agency is just getting started. But the agency has already begun its first initiative — to merge two complicated mortgage disclosure forms into one simple form that consumers will be able to understand and that doesn’t contain tricky wording or loopholes.

However, until the Senate confirms a director of the bureau, its powers will be limited. An advisor in the Obama administration, Elizabeth Warren has been working to launch the bureau since last September. She was the most likely candidate to head the agency, but Senate Republicans have prevented her nomination and threaten to do the same if President Obama puts up former Ohio Attorney General Richard Cordray for the job. By forcing the agency to launch without a leader, Republicans have successfully undermined the new bureau, preventing it from beginning to develop priorities and focus.

However, Republican efforts to cripple the agency might backfire with their constituents. Experts are saying that the financial crisis could have been avoided had the agency been in place. The CFPB takes over the power to enforce consumer financial protection laws from many different pre-existing federal agencies, including the Federal Reserve, which failed to limit sub-prime mortgages for 14 years until they caused the financial crisis in 2008.