President Barack Obama asked Congress on Tuesday to create a new agency to police the fine print on consumer products like credit cards and mortgages and determine what fees, penalties and interest rates are fair.
The Consumer Financial Protection Agency would be in charge of regulating those products in the same way other government agencies regulate the safety of drugs, food and toys.
Obama said Americans are demanding it.
“Those ridiculous contracts with pages of fine print that no one can figure out — those things will be a thing of the past,” the president said in a statement accompanying the 152-page draft bill. “And enforcement will be the rule, not the exception.”
The CFPA is part of Obama’s broader plan to increase oversight of the financial industry and eliminate regulatory gaps believed to have contributed to the economic crisis.
The agency would be dedicated to protecting consumers when buying mortgages, using credit cards and taking out high-rate “payday loans.” It also would monitor terms set on savings, checking and debit card accounts, including overdraft charges.
Under the plan, lenders would be required to be up front about their products and compare them to less risky, “plain vanilla” options. The agency potentially could require a kind of warning label on such financial products as mortgages with payments that suddenly balloon in size.
The agency’s reach would not extend to investment products like mutual funds and other services already regulated by the federal government. Instead, it would focus on regulating a market that so far has mostly escaped it. Predatory lending is blamed for contributing to the housing crisis that roiled Wall Street and resulted in a $700 billion taxpayer bailout for banks.
Democrats in Congress have embraced the idea of a consumer financial watchdog as a way of showing voters they are on their side during tough economic times. Republicans and bankers, however, already are balking and gearing up for a fight.
“This isn’t only bad government but big brother lurking at everyone’s doorstep,” said Tom Quaadman, executive director of the U.S. Chamber of Commerce’s center for capital markets.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, called the proposal one of his highest priorities and said his panel would take up the bill in July.
Sen. Christopher Dodd, who faces a tough re-election fight next year, also vowed to steer the proposal through the Senate Banking Committee he chairs despite staunch opposition from the banking industry.
“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,” said Dodd, D-Conn.
Republicans counter that setting strict rules on the consumer market will limit options for buyers and potentially increase the cost of financial products as banks try to make up for lost revenue.
Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said the bill could give consumers a false sense of security when it comes to selecting financial products.
“The proposed CFPA appears to be premised on the idea that Washington is better at making financial decisions for all Americans than leaving that choice up to individual Americans,” he said.
Proponents of the agency say its creation doesn’t have to mean fewer products on the market.
Elizabeth Warren, a Harvard University professor who long has advocated creation of a consumer-protection agency, said she envisions a system that would allow products to remain available as long as lenders are up front and concise about their terms.
“Most of the bad products were marketed by trickery,” she said.
Likewise, Treasury Department officials said the agency’s goal wouldn’t necessarily be to lay a heavy hand on industry. The legislation explicitly requires the CFPA to consider the burden any new rule would place on a financial institution and whether it would restrict consumer access to credit.
Compliance would be enforced through penalties, but the CFPA also would require an annual operating budget, which has yet to be disclosed. The agency would be independent of other government agencies that now share those oversight duties and take away some power from some, most notably the Federal Reserve.
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.
