Momentum is gathering on Capitol Hill for a new watchdog consumer agency devoted to credit and lending consumer issues. The agency falls under the Wall Street Reform and Consumer Protection Act of 2009. Here’s what the new agency would cover — and a look at its probability of passage.
The genesis for the new agency is the now two-year long economic downturn, which has been fueled by predatory lending practices. The malaise has also been extended by hidden bank and credit card fees that have hampered the efforts of the Great American Consumer to get back up on his or her financial feet.
To help fix the mess, a U.S. House vote on Dec. 11 approved the creation of the new agency, and the U.S. Senate’s Financial Services Committee has already approved the legislation.
According to the Senate’s version of the proposed bill, the new agency’s mission will be to “promote a fair and transparent marketplace for financial products and to safeguard the American public from abusive industry tactics.” The bill also extends federal supervision to a host of financial industries, such as payday lenders and mortgage originators, which should please consumer advocates who have been critical of those industries.
Says President Obama, a huge supporter of the bill: “You’ll be able to compare products and see what’s best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out — those things will be a thing of the past.”
Under the “What This Means for Consumers” portion of the U.S. Treasuries proposal (see the whole thing here). The new agency will:
- Protection Against Unfair Credit Card Rate Increases, Late Fee Traps: The agency will enforce the credit card bill enacted by Congress and President Obama this spring, taking responsibility for enforcing the ban on unfair rate increases and for the implementation of new rules preventing late fee traps.
- Establish Guidelines for Simple "Plain Vanilla" Products: The agency could create guidelines for standard mortgages that have no prepayment penalties, are fully underwritten with documented income, collect escrow for taxes and insurance and have predictable payments.
- Create “Duties of Care” for Mortgage Brokers: The agency could require mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, and a duty to help ensure that only appropriate loans are offered.
- Ban Unfair Side Payments: The agency could ban unfair practices such as "yield spread premiums" — side payments from lenders that encourage mortgage brokers to push consumers into higher-priced loans.
The bill faces stiff opposition, both from House and Senate Republicans (no Republican voted for the House version of the bill) and from Wall Street, which has little interest in facing the kind of government scrutiny the agency would have the power to wield.
Banks are particularly upset about the proposed agency. “The breadth of authority granted to the director of the proposed new consumer financial regulator is unprecedented, and this new regulator would not be responsible for considering institutional safety and soundness along with consumer protection," said Edward L. Yingling, president of the American Bankers Association trade group.
Adds Yingling, "Reform is needed, and ABA wants to work with the Congress and the Administration to enact that reform, but the House-passed bill contains provisions that have nothing to do with needed reform and which could make it very difficult for banks to effectively serve their consumer and business customers."
Look for both sides to battle it out, with a vote on the new consumer agency set for early 2010.
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