By Zachary A. Goldfarb, Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Wednesday, May 20, 2009
The Obama administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds, according to several sources familiar with the matter.
The proposed commission would be one of the administration's most significant steps yet to overhaul the financial regulatory system. It would also be one of its first proposals to address causes of the financial crisis such as predatory mortgage lending.
Plans for a new body remain fluid, but it could be granted broad powers to make sure the terms and marketing of a wide range of loans and other financial products are in the interests of ordinary consumers, sources said.
Sources, who spoke on condition of anonymity because discussions are ongoing, said talks have begun with industry officials, lawmakers and other financial experts about the proposal, which would require legislation. Last night, senior policymakers, including Treasury Secretary Timothy F. Geithner and National Economic Council Director Lawrence H. Summers, were to discuss the idea at a dinner held at the Treasury Department.
Responsibility for regulation of consumer financial products is currently distributed among a patchwork of federal agencies. Some of these regulators regard consumer protection as a low priority. And some financial products are not regulated at all.
The proposal could centralize enforcement of existing laws and create a vehicle for imposing tougher rules.
The idea is likely to face significant opposition from industry groups, which argue that stricter regulation limits the availability of financial products to consumers.
It could also trigger a massive regulatory turf war. Banking regulators and agencies such as the Securities and Exchange Commission, which regulates mutual funds, could stand to lose powers, personnel and funding. Those agencies are likely to argue they are positioned to protect consumers because they oversee the financial firms directly and have experience writing and enforcing rules governing financial products.
The proposal is part of the administration's broader plan to improve financial regulation. Officials have proposed the creation of a systemic risk regulator whose job would be to spot threats to the health of the overall financial system. Officials also have called for tighter regulation of individual financial firms and markets, including new rules governing hedge funds and derivatives.
While those proposals focus on the guts of the financial system, this new plan would concentrate on the front end -- consumers who borrow money to buy homes and products and who invest their money for retirement, college education and savings.
The leading proponent of such a commission is Elizabeth Warren, a Harvard University law professor who now chairs the Congressional Oversight Panel for the government's financial rescue initiative. Her plan is the kernel of the idea the White House is now considering, sources said.
Warren wrote in a 2007 article in the journal Democracy that the government had failed to protect American consumers in their relationships with financial companies.
"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street," Warren wrote. "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?"
Warren proposed creating a new commission modeled on the Consumer Product Safety Commission, which protects buyers of products such as bicycles and baby cribs.
Such a commission could be very powerful. A number of sweeping federal laws already offer broad protection to consumers of financial products, but those laws have been lightly enforced in recent years.
The Department of Housing and Urban Development, for example, has clear authority to crack down on companies that charge excessive closing costs on mortgage loans, but repeatedly postponed planned reforms in the face of industry opposition.
Warren's proposal initially found little support in Washington, but the mood has shifted dramatically with the onset of the financial crisis and the election of a Democratic administration.
In March, Sen. Richard J. Durbin (D-Ill.) introduced legislation to create a commission like the one that Warren had described. The legislation is co-sponsored by Sen. Charles E. Schumer (D-N.Y.) and Sen. Edward M. Kennedy (D-Mass.). The White House's support would greatly improve its chances of passing.
In proposing the legislation, the senators said that the commission would be responsible for identifying emerging problems and for educating consumers.
They were also critical of the existing process.
"The Federal Reserve was supposed to do this, but they were asleep at the switch," Schumer said at the time.
Staff writer Neil Irwin contributed to this report.