I spent the day at the US Capitol yesterday, at an event sponsored by CFSI, Pew and New America to discuss how the Consumer Financial Protection Agency (CFPA) should contemplate the underbanked (Marketplace on NPR did a little piece on it, quoting Melissa Koide and myself).  Representative Barney Frank spoke and offered an interesting operating metaphor for why the CFPA should exist, “we regulate medicine, so people only get medicine that helps them get better.”  This is true and it is a good practice.

It is certainly also true that financial services can adversely effect people’s lives.  And even more so for economically vulnerable people.  But can the wrong financial product harm someone as much as a nasty flue strain?  I’d argue yes, even that is essentially true.  A string of poor financial exchanges can ruin your credit for years to come, can easily consume all your liquid assets (especially if you don’t have a lot to begin with), and subject you to a miserable strain of collectors.  Granted, bankruptcy is a sort of get out of jail for free card, but then even the best surgery or medicine might offer recovery with lasting negative side effects as well.  In all, it seems like a useful metaphor, so let’s extend it.

I like the idea of an agency in charge of protecting the financial “health” of the consumer.  It does seem like that charge can, and has, gotten lost with other regulators which also see to safety and soundness and the like.  There are millions of underbanked who could benefit from such a watchdog.  That said, I worry that the CFPA could restrict access to financial services by chopping away at products it deems unhealthy or malicious, without giving heed to the fact that these products – like various forms of short term credit – have massive demand, which won’t disappear even if the product is outlawed.  Taking Prozak off the market won’t eliminate the need.

There is also a distinction between over the counter drugs and those which require a prescription.  Perhaps the CFPA can also draw a distinction between what products really require additional layers of oversight.  It seems like a mortgage can have substantially greater positive and adverse impact on a person – and our society – than a check-cashing transaction or a well designed short-term loan.  Even then, who in this scenario would be the doctor, if the CFPA would be the financial equivalent of the FDA?  Or do we find a way to re-establish the notion of the ’50s community banker or the current day financial advisor for that purpose: someone who knows you, your situation and help prescribe financial products that are “good” for your financial health.  Perhaps there is a technology solution for this?  Hello Wallet?

And speaking of well designed anything, as Yale economist Dean Karlan pointed out, the FDA runs elaborate empirical tests on any drugs allows on the market.  Rep. Barney and others have shown disappointingly little interest in any such empirical tests about what products are actually good or bad for the financial health of underbanked.

It seems that the medical metaphor introduces several important ideas and I’m sure there are others: who is the impartial, knowledgeable equivalent of the doctor?  How can we discern between the financial equivalent of a headache and cancer drugs?  And let’s test the products we regulate for their impacts and side-effects on the underbanked.