Financial plan sent to Congress
WASHINGTON — President Barack Obama’s 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.
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.
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 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.
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 easy payday loans.
"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," he said.
In a nod to concerns raised by financial institutions, the 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 they weren’t burdensome to commercial activity.
Although financial firms have voiced support for the concept, 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 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.
One of the agency’s main powers would be enforcing the credit card legislation 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 and widely credited for the idea of a Consumer Financial Protection Agency.
Importantly, the legislation would require mortgage brokers to find the best deals for prospective homebuyers. The lack of any such requirement was key to the subprime mortgage crisis. Many homeowners were pushed into exploitive mortgages, wrongly assuming that mortgage brokers, who help arrange financing, had their best interests at heart.