A new Consumer Financial Protection Agency was proposed by President Barack Obama on Wednesday, as part of a sweeping plan to upgrade “an outdated system of financial regulation” that failed to prevent the nation’s financial crisis.
This new agency, which Obama said would be “charged with looking out for ordinary citizens,” would have broad authority to regulate financial products such as credit cards and mortgages and ensure their terms are fair and easy to understand, with no hidden twists that could leave unwary consumers over their heads financially.
If Obama’s huge financial reform package is approved by Congress, which the president said he hopes will occur by year’s end, the Consumer Financial Protection Agency could ban “unfair terms and practices” and punish companies for violations with fines and penalties. But the consumer agency and other parts of the overhaul package face strong opposition by major industry groups and by some in Congress.
The centerpiece of the Obama plan—and the most controversial part—is giving the Federal Reserve broad new powers to supervise any firm that could pose a threat to the nation’s financial stability, even those firms that do not own banks. Many in Congress are wary of giving the largely independent Fed such sweeping powers.
The Obama plan would also create a top-level Financial Services Oversight Council to watch out for emerging risks. It would strengthen regulation in several segments of the financial industry that are blamed for causing the current crisis, including private hedge funds, credit rating agencies and exotic securities such as derivatives. And it would seek to coordinate worldwide regulation of international financial practices.
The consumer agency is based on an idea by Elizabeth Warren, the Harvard Law School professor and consumer advocate who chairs the congressional panel overseeing the $700 billion banking bailout.
“The Consumer Financial Protection Agency could have prevented the current economic crisis by taking excessive risk out of the system,” Warren told Bulletin Today after Obama’s White House briefing. “Now, it can help end this crisis and prevent future ones. A new consumer agency can fix the broken credit market by increasing transparency and information available to consumers, reducing the spread of dangerous and deceptive products, and making room for positive innovation.”
In March, Sen. Dick Durbin, D-Ill., introduced legislation to create such a regulatory agency. The leaders of two key committees told reporters on Capitol Hill Wednesday they would take quick action on Obama’s overall proposal.
“We’ll have it done this year,” said Sen. Chris Dodd, D-Conn., head of the Senate Banking Committee.
“I’m fairly optimistic that we’re going to have a product that looks a lot like what the president wants on his desk by the end of the year,” agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.
But Republicans have already signaled opposition. “I think it’s just going to be too big of a foot on an industry that already is having financial problems,” House Minority Leader John Boehner, R-Ohio, said Wednesday on ABC’s Good Morning America.
The notion of a new consumer protection agency was also criticized by the American Bankers Association.
“Reform of financial regulation is needed,” Edward L. Yingling, president and CEO of the trade group representing many major lenders, said in a statement to Bulletin Today. “There is a broad consensus to move forward on key areas relating to systemic risk regulation, the resolution of systemically risky firms, and filling gaps in the regulation of the shadow banking system. The inclusion of the highly controversial Consumer Financial Protection Agency will undermine chances of enactment of needed reform.”
In his briefing, Obama said the agency was needed to protect the Americans against practices that led to the current recession, which he characterized as “a culture of irresponsibility.”
“There are retirees who lost much of their life savings,” said Obama. “Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and the failure of their government to provide adequate oversight.”
The Treasury Department issued an 88-page white paper detailing Obama’s proposal.
Sid Kirchheimer writes about consumer issues for AARP Bulletin Today.