In a move that is drawing stiff opposition from business groups, the Obama Administration is calling for a new Consumer Financial Protection Agency that will regulate providers of financial services. The new agency, to be announced by the White House on June 17 as part of a broad set of financial regulation changes prompted by the economic meltdown, was described by an Administration official as a "strong independent agency with full authority to protect consumers" and oversee "credit, savings, payment, and other consumer financial products and services."
The official said the new agency would be responsible for promoting clear information for consumers and protecting them from unfair and deceptive practices. At the same, it would seek to promote "fair, efficient, and innovative financial-services markets for consumers" and improve access to financial services.
Expensive or confusing consumer products, particularly exotic mortgages, have been blamed for causing some consumers to take on financial risk that turned out to be unwise or unmanageable—which in turn weakened major financial institutions, helping to precipitate the broader financial crisis.
remedying "divided attention"
President Obama began a public relations push for his regulatory reforms on June 16, appearing in several television interviews. "The problem is right now you have consumers and investors, [and] the agencies that are responsible also have responsibility for the integrity of the institutions," Obama said in an interview with Bloomberg TV. "So you've got divided attention. We want to make sure we've got a consolidated focus on consumer and investor protections."
The new agency will oversee mortgages, credit cards, debit cards, gift cards, and consumer and payday lending, as well as deposit accounts and related services, including overdraft protection, according to people involved in the planning. Investor protection—with oversight of mutual funds, money-market funds, 401(k) plans, etc.—would remain with the Securities and Exchange Commission.
Along with the new Consumer Financial Protection Agency, the key elements of the plan are expected to include an expansion of the Federal Reserve's oversight of large financial holding companies whose failure could threaten the global economy and new rules to raise capital and liquidity requirements for financial institutions. The Office of Thrift Supervision, which oversees savings-and-loan institutions, would be merged into the Treasury's Office of the Comptroller of the Currency, which oversees national banks; the combined agency, dubbed the National Bank Supervisor, would work with the Fed, which oversees bank holding companies. The Administration's reform plan also includes proposals to beef up bank capital requirements, and previously announced proposals to regulate derivatives and other financial products and to give the federal government better powers to shut down and dismantle large, failing financial institutions that aren't banks.
state rules can be tougher
The proposed consumer protection agency will have enforcement authority to write rules for bank and nonbank firms and enforce the rules through orders, fines, and penalties. The rules will be "a floor" for state rules, which can be tougher. States will be able to enforce the new federal rules, the Administration said. The agency will have authority to examine firms for compliance. Giving the agency broad authority over all sorts of financial institutions will "ensure that banks, nonbanks, and independent mortgage brokers all play by the same rules and no lender or broker falls between the cracks of supervision or enforcement," according to the Administration.
Among the standards the agency is expected to push for is a requirement that financial-services companies provide easy-to-understand "plain vanilla" offerings along with other financial products. While financial firms would be free to market other kinds of products, they would meet with stricter regulation and might be required to hold extra capital. The plan would also require mortgage brokers to make sure that homeowners are offered the best available products, restrict or ban mortgage prepayment penalties, and ban economic inducements to push consumers into higher-priced loans. It would also require originators of loans to keep at least 5% of the credit risk in any securitization so they "retain skin in the game."
Business groups immediately began a pushback on the proposal for a new agency. "You cannot separate consumer protection from other regulatory concerns," said American Bankers Assn. President and CEO Edward L. Yingling in an e-mailed statement. "For example, in the extensive regulation of holds on deposits, the Fed balances consumer protection with safety and soundness, which includes billions of dollars annually in attempted check fraud, and with the capabilities of the elaborate system for clearing checks. That balance would be lost and banks would be subject to conflicting regulation between safety and soundness and consumer regulation in many instances."
Yingling said that creating a new agency flies in the face of efforts to streamline banking agencies. Plus, he said, the broad authority proposed for the agency would be "an unprecedented grant of power to mandate business practices."
"yet another regulatory layer"
David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said in a briefing, "We will not support a standalone consumer protection agency that cannibalizes regulatory expertise, adding yet another regulatory layer." He added: "The Chamber will strongly support regulations that will make the regulatory system more effective. And we'll put up a fight when it comes to regulations that will add to the layering, duplication, and gaps of the current system. We need real reform to spur the efficient capital formation needed to secure real long-term economic growth and job creation."
But Harvard's Elizabeth Warren, the head of the Congressional Oversight Panel policing the bailout of the financial markets and the driving force behind the creation of the consumer financial agency, countered that the new agency is not only about consumer protection, but limiting systemic risk. "It's about protecting the stability of the markets. This crisis started with one household at a time, one lousy mortgage at a time."
Meanwhile, more than 200 state and local consumer advocacy groups announced a new coalition on Tuesday, Americans for Financial Reform, calling for "game-changing solutions" to solving the problems plaguing the financial sector. They broadly backed the public details of the Obama proposal, and in particular the plan to establish a consumer-protection agency.
"Our economy collapsed because of a lack of strong consumer protections. That's why reform must include establishment of a strong, independent consumer regulatory agency with the will and the authority to protect consumers from dangerous, deceptive financial practices," U.S. PIRG's Consumer Program Director Ed Mierzwinski said in the organization's news release.