White House Issues Detailed Proposal for Consumer-Finance Watchdog
Wednesday, July 1, 2009
The Obama administration sent a detailed proposal to Congress yesterday for creating an agency to oversee nearly all facets of consumer lending, but the breadth of its powers is setting the stage for a fierce clash on Capitol Hill.
The bill aims to establish a Consumer Financial Protection Agency to guard Americans from the abusive lending practices that contributed to the financial crisis, such as undocumented mortgage applications, the poor disclosure of loan terms and deceptive ads.
Administration officials proposed that the new regulator have a broad mandate to cover the spectrum of consumer financial products and to fill gaps in current regulations. The agency would have the power to probe any lender, impose penalties of up to $1 million a day in cases of wrongdoing, limit the compensation even of loan officers and mortgage brokers, and check if banks have been acting discriminatorily by forcing them to disclose the race, age and gender of their customers.
An intense lobbying effort has already begun to win over the few undecided lawmakers who will be critical in deciding which details will be included in the final bill. Industry groups say they are forming a coalition to persuade members of Congress to scale back the bill.
"I think when people read this, they will be shocked about the incredibly broad delegation of power," said Edward L. Yingling, chief executive of the American Bankers Association. "It basically can do almost anything it wants. . . . I think there will be opposition simply on the breadth of it, on the balance of power between Congress and an agency."
Some critics warn that lawmakers may be afraid to oppose parts of the bill because of appearances. "If you argue against the agency, then you could be incorrectly painted as arguing against consumer protection," said Scott Talbot, senior vice president of government affairs at the Financial Services Roundtable.
Industry representatives say they are particularly concerned that the agency could intervene in the daily business practices of lenders -- for instance, how they design loans, or how much they pay employees. An official at one of Wall Street's largest banks said the new agency, for example, could compel lenders to offer loans to poor consumers who have shaky credit histories even if this could jeopardize the firms' health.
In a briefing with reporters, Michael Barr, assistant secretary for financial institutions at the Treasury Department, said yesterday that the bill represents a return to deeper regulation of a sector that had shed much federal oversight in recent years. He added that the new rules will "level the playing field" by standardizing regulations that apply to different loan products.
"I don't think that it's a surprise that big banks . . . that benefited from the status quo want to keep it that way," he said. "It's a very hard argument for a big bank to make that the status quo on consumer protection was enough. . . . We have the view that the market, left to its own devices, isn't always going to result in an optimal result for consumers."
Rep. Barney Frank (D-Mass.), chair of the House Financial Services Committee, said that he would take quick action and that he aims to approve the committee's version of the bill before Congress's summer recess begins on Aug. 3.
"The federal regulatory system has clearly failed to provide adequate protection for consumers and that failure contributed to the broader economic crisis," he said. "That is why I have made the creation of the agency one of our highest priorities."
But Frank would have to overcome resistance from the other side of the aisle.
"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," said Rep. Spencer Bachus (R-Ala.), the ranking member on the committee. "The best way to protect consumers is not through the creation of another bureaucracy accountable to no one but by consolidating the regulatory system and holding regulators accountable."
Some consumer groups said the bill does not go far enough.
John Taylor, chief executive of the National Community Reinvestment Coalition, which advocates for affordable housing, said he generally supported the measure, particularly disclosure requirements that force small-business lenders to reveal whether they have been holding back credit from minority- or women-owned businesses. But Taylor said he has lobbied the White House to give the agency the authority to approve or deny mergers of financial firms based on whether these would benefit consumers.
Some matters have yet to be resolved. The administration did not specify how the agency will be funded, other than stating that some money will come from the financial services industry. In addition, the measure says the president can appoint four commissioners but does not detail what criteria he should use. The fifth and final commissioner would be the head of a new banking regulatory agency.