New agency to bundle consumer protection

WASHINGTON — The Obama administration 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 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 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.

The agency would be run by a five-member board with four members nominated by the president and confirmed by the Senate. The fifth member would be the director of the new National Bank Supervisor, the merged agency the administration is proposing to create to take over bank-regulation duties.

Costs, benefits

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.

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 subprime 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.

Kickbacks

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?"