This guest post is from Ellen Harnick from the Center for Responsible Lending.

Over the past decade, federal bank regulators looked the other way as responsible loans were crowded out of the market by aggressively marketed financial products carrying hidden costs and fees. Tricky products, whose most “innovative” feature was their ability to obscure their true cost, led a race to the bottom that stifled innovation of any benefit to consumers. The aggressive marketing of these products caused an enormous loss of wealth across the middle class and sparked the current economic crisis.

While some lenders are quick to blame homeowners for the resulting foreclosures, the fact is that in the subprime market, where the crisis began, the most common product was one that had to be refinanced every two years, typically requiring the borrower to pay more than 3 percent of the loan balance – plus refinance fees – each time. In most instances, the homeowner could have received a 30-year, fixed-rate loan that would have cost less over those first two years – and still less when compared with the higher rates that prevailed after the second year. Instead of offering these lower-cost loans, subprime lenders pushed homeowners into more expensive, more volatile loans, because Wall Street paid more for them. Federal regulators could have stepped in, and should have, but they didn’t, at least not until long after the damage was done.

This catastrophic failure resulted from the structure of our regulatory system, which allows bankers to choose which federal agency will oversee them. The process of regulator-shopping is a large reason we’re facing the current financial disaster. Because each bank regulator’s budget depends on fees from the very banks each is supposed to oversee and police, a system has evolved where regulators try to please the banks they monitor to prevent them from bolting to a competing regulator—-and taking the fees they pay with them. As regulators strove to please those they are supposed to police, they sacrificed important consumer protection standards.

Any regulatory reform requires that we eliminate such conflicts of interest and ensure that a regulator charged with consumer protection is truly committed and has the resources to do its job. A new regulator such as the Obama administration and several members of Congress have proposed must be independent of the financial institutions whose behavior and practices it oversees.

Currently, there is no federal financial regulator focused primarily on consumer protection. To the contrary, in addition to supposedly watching out for consumers, each federal bank regulator is responsible for what’s called prudential regulation, that is, ensuring that banks operate in a safe and sound manner and are financially secure. It seems obvious that banks cannot be safe and sound while making loans that cannot be repaid, but a flow of short-term revenue blinded regulators to the harm being done to consumers and the banks themselves.

Allowing lenders to push consumers into loans with higher interest rates and fees rather than offer them lower-cost mortgages for which they qualified – and worse, to put consumers into loans they could not afford to repay – appeared in the short run to be working. In fact, when borrowers had trouble paying their loans, some financial institutions would simply offer to refinance them. As a result, regulators not only forgot about consumer protections but came to regard them as interfering with banks’ business model and therefore undercutting safety and soundness. When home values stopped rising, refinance options were cut off, and more and more families fell into foreclosure. Each foreclosure reduced the property values of surrounding homes, seeding additional foreclosures. The current crisis has revealed that projected revenue from these unfair and deceptive products were an illusion, forcing taxpayers to step in with trillions of dollars to limit the resulting losses.

Many of the most abusive practices were perpetrated by subprime “mortgage bankers” that are not actual banks, and so were not supervised by the federal banking agencies. Meaningful reform means giving an agency sufficient supervisory authority to protect consumers from all abusive financial products, regardless of the kind of company selling them. And standards of fairness should hold across product lines —- why should deceptive mortgage practices be banned but abusive credit card, overdraft or other small loan practices continue? Proposals for a dedicated consumer protection regulator would bring a rational approach to all financial products.

Equally important, these consumer protection proposals would restore the type of checks and balances that are at the heart of our democracy. While Congress and the regulators were slow to take action against predatory lending, many states tried to provide protection for their residents by passing laws to address some of the most egregious abuses. But their efforts were thwarted by federal regulators, who argued that state consumer protection laws don’t apply to federally supervised banks. Moving forward, efforts to improve consumer protection should restore the ability of state officials to go beyond federal efforts to address particular abuses that arise within their borders. Federal law should be a floor, not a ceiling, for consumer protection standards.

Some lenders have misused the banner phrase “free market” over the last 10 years to press for what in many ways has been a lawless market, with no commonsense effort to restrain excess, recklessness and in too many cases downright deception. Arguing that reining in market abuses would lead to “unintended consequences,” reckless lenders persuaded regulators and some policymakers to do too little for too long – producing consequences more dire than anyone imagined. This loosening of oversight did not promote competition but instead unleashed a race to the lowest standards possible, making it impossible for responsible lenders to compete.

In other areas of economic life, America’s consumer markets have been distinguished by standards of fairness, safety and transparency. Financial products shouldn’t be the exception. We need a strong, independent consumer protection agency that’s accountable to the public, free of conflicts of interest and empowered to keep markets free of abusive financial products. It’s the only way to restore consumer confidence, stabilize markets and put us back on the road to economic prosperity.

—Ellen Harnick is senior policy counsel for the Center for Responsible Lending, a non-profit, non-partisan research and policy organization based in Durham, N.C., and with offices in the District and California.