Slimmed down but still powerful, a new Consumer Financial Protection Agency has taken a major step toward becoming reality.
On Thursday, the House Financial Services Committee approved legislation to create what would be the first single federal agency with the power to examine and enforce rules for mortgages, credit cards, payday loans and other lending products and services.
The measure must still win approval of the full House, expected in November, and then move to the Senate, where some predict a stronger challenge to the agency.
Already, after weeks of intense lobbying and votes on two dozen amendments in the House panel, the Consumer Financial Protection Agency (CFPA) is shaping up as a less robust regulator than the one proposed by President Barack Obama last June.
In its current form, here’s what the CFPA would do, and what it wouldn’t.
One agency, one mission
Its core mission is to prohibit unfair and deceptive practices, such as excessive overdraft fees and other penalties that sometimes lie hidden in the fine print of loan documents and credit card contracts.
By concentrating authority under one roof, the CFPA would largely replace a system that spreads government regulation of consumer lending and credit over at least seven federal agencies.
“Banks and other lenders can now pick and choose their regulator in an effort to seek softer oversight,” says Elizabeth Warren, a Harvard law professor who conceived the concept of the oversight agency. For example, she notes, all it takes is a simple change in a bank’s charter to turn it into a savings-and-loan institution.
“Financial institutions just go somewhere else, taking with them the dues they would have paid the first regulator,” she says. Since federal agencies are anxious to avoid budget shortfalls, Warren tells the Bulletin Today, “financial institutions can shop around for the regulator that provides the most lax oversight.” That creates opportunities for predatory lending, excessive fees and other abusive practices in consumer financial products.
The CFPA would consolidate oversight as “one agency focused on one simple mission—protecting consumers,” says Treasury Secretary Timothy Geithner. “While there is more work ahead, today we are much closer to putting in place strict new rules of the road for the financial industry.”
Before Thursday’s 39-29 vote in the House Financial Services Committee, Chairman Barney Frank of Massachusetts and other Democrats fended off several Republican amendments that would have weakened the CFPA.
But the panel still pared the new agency’s powers in several ways:
- Some 8,000 community banks and credit unions, which officials say bear little blame for last year’s financial crisis, would have to follow CFPA rules, but their oversight would be handled by existing regulatory agencies. This applies to banks with less than $10 billion in assets and credit unions with less than $1.5 billion in assets.
- Gone is a much-discussed provision originally suggested by Obama requiring lenders to offer “plain vanilla” financial options, such as 30-year mortgages that have fixed rates and are easy to understand.
- Some industries won exemptions from CFPA oversight: providers of Individual Retirement Accounts, 401(k) retirement savings plans, 529 college-savings programs and pension plans; real estate brokers and agents; lawyers and accountants; car dealers and retailers; and sellers of gift cards.
- Also scrapped was a proposal requiring banks to take reasonable steps to make sure customers understand what they are buying, after critics highlighted the difficulty of enforcing it.
- A compromise was reached on another Obama proposal, to make lenders comply with state laws when they offer stronger consumer protection than federal law. Banks and their Republican allies in Congress argued strongly for the current system in which federal laws preempt state laws, saying that a change would force the industry to deal with 50 separate regulators instead of one in Washington. In the end, the committee decided that states could enforce their laws, but a federal official could override the state laws if they “significantly interfere” with national banks’ business.
- Issuers of credit, mortgage and title insurance are also exempt from CFPA oversight in the House committee’s bill. “The problem with these products is that they are virtually worthless, and consumers get stuck paying for them,” Susan Weinstock of the Consumer Federation of America says of such insurance. “We estimated that in 2004 alone, consumers overpaid about $17.5 billion for credit insurance alone.”
Consumer advocates more pleased than lenders
Still, Weinstock considers the CFPA legislation “a huge win for seniors and other consumers,” an opinion shared by other consumer advocates and the White House.
The American Bankers Association, which has spent millions of dollars lobbying Congress this year, considers the agency unnecessary and restrictive.
“The American Bankers Association supports the goal of improved consumer protections,” Floyd E. Stoner of the nation’s largest bankers group said in a prepared statement. “However, ABA remains opposed to this legislation because we still have major concerns with some principal areas, including restrictions on preemptions standards for national banks and savings associations, and the very broad, ill-defined authority that is granted to this new agency that could be used to justify essentially any regulatory action.”
Sid Kirchheimer writes about consumer and health issues.