WASHINGTON — The Obama administration on Tuesday sent Congress a detailed plan to create one of the most ambitious parts of the president's proposed overhaul of financial regulation, a Consumer Financial Protection Agency.
The Treasury Department's proposal would gather consumer protection powers that now are spread among many bank regulators and place them under a single roof. If it's enacted, this would be a huge step by government into private banking after a hands-off approach for the past two decades.
For ordinary Americans, the most important feature is that the agency would have the sole mission of consumer protection. One lesson of the financial crisis is that the several agencies that shared that responsibility made it a lower priority than their other missions and failed to protect consumers.
President Barack Obama proposed the agency in response to the nation's deep financial crisis, which is rooted largely in shoddy mortgage-lending practices that exploded in the first half of this decade thanks to regulatory gaps and weak enforcement of consumer protection rules.
The proposed legislation would give the new agency powers to set and enforce standards for things such as mortgage and credit-card disclosure statements. It also would cover payday lending and other forms of consumer credit, even stored-value gift cards from retailers. Its reach would span at least 16 existing consumer-protection laws and numerous federal agencies.
"We have the view that the market, left to its own devices, isn't always going to lead to an optimal outcome for consumers," Michael Barr, the assistant treasury secretary for financial institutions, said in a news briefing.
Financial institutions said the move went beyond a step back to regulation.
"This is going in headfirst," said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, the lobby for the nation's biggest financial firms. "This could take us back to the 1950s."
While denying that the legislation is heavy-handed, Barr acknowledged that it would open a new era of financial regulation.
"I don't think it's a surprise that big banks and institutions that benefited from the status quo want to keep it that way. It's unacceptable to us," he said.
In a nod to concerns raised by financial institutions, the new agency would be required to weigh beforehand the potential costs and benefits of any actions it might take, and to monitor how those actions worked to ensure that they weren't proving burdensome to commercial activity.
Although financial firms have voiced support for the concept of greater regulation, this proposal could get in their way significantly. For example, the new agency would have the power to restrict certain kinds of mortgages or credit card terms. That might protect consumers, but financial firms fear that it also might inhibit legitimate business practices.
"It allows the agency to set the terms of a financial product, and that could have a chilling effect on creativity and innovation of products," Talbott said.
He also worried that the agency would set not a ceiling but a floor for consumer protection rules. "States are encouraged to go further to provide additional consumer protections, which will create a patchwork of 50 state regimes. The result of that will be to raise the cost of doing business," Talbott said.
One of the agency's main powers would be enforcing the credit card legislation that Congress passed earlier this year. It aims to end unfair rate increases and will impose new rules on late-payment fees to prevent nasty surprises to consumers.
"When a customer can't read the papers at a mortgage closing or make a quick comparison of credit cards to see which ones have hidden terms, the credit market is broken," said Elizabeth Warren, a Harvard University professor who's the head of a congressional watchdog panel that's overseeing the spending of Wall Street bailout money.
The idea of a Consumer Financial Protection Agency is widely credited to Warren, a longtime consumer advocate. She said it "will stop tricks-and-traps pricing and give customers the chance to make real comparisons among financial products. The market can work for customers and for the small banks and credit unions that want to serve those customers with good products."
Importantly, the legislation would require mortgage brokers to find the best available deals for prospective homebuyers. The lack of any such requirement was a key element of the sub-prime mortgage crisis. Many homeowners were pushed into exploitive mortgages, wrongly assuming that mortgage brokers, who help arrange financing from underwriters, had their best interests at heart.
In fact, mortgage brokers had no fiduciary responsibility to homebuyers. Many received legal kickbacks from lenders called "yield spread premiums," which were essentially bonuses, when they got homeowners into loans with interest rates higher than they'd qualified for. The Obama legislation would ban these payments.
The legislation will move first through the House Financial Services Committee. Chairman Barney Frank, D-Mass., has said he hopes to move the measure through his panel by the end of July.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Tuesday that a Consumer Financial Protection Agency was long overdue.
"Creating an independent agency whose sole focus is protecting consumers — be it credit card holders, anyone with a bank account or families with mortgages or student loans — is really the key to creating the foundations for a stronger economy," Dodd said in a statement. "It is unbelievable that some of the same irresponsible actors that helped create the current financial mess would argue that we are doing too much for consumers. Don't they realize that they need a healthy customer base if they want to continue to be successful?"
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