It would be the most sweeping change to American consumer protection in decades, perhaps since 1930. It would wrest power away from major banking regulators and the Federal Trade Commission and place it in the hands of five appointees charged with putting consumers first.
And apparently it scares the heck out of the banking industry and other business interests.
Debate on proposed Financial Product Safety Commission, brainchild of Harvard bankruptcy expert Elizabeth Warren, is about to heat up in Congress. The new government office would be the first major new federal consumer protection agency since the creation of the Federal Trade Commission in the 1930s. As proposed, the new commission would have the authority to subpoena and fine corporations, enforce requirements for clear contracts, provide a single place for consumers to register complaints, collect and share information on misbehaving companies and much more.
Perhaps the most dramatic provision of the legislation would be the "transfer of functions" from the Federal Reserve, Comptroller of the Currency, Office of Thrift Supervision, FDIC, National Credit Union Administration and Federal Trade Commission to the new agency.
"It's a reflection of the degree to which those folks haven't done the job," said Gail Hillebrand, financial services expert with Consumers Union.
Until now, she said, consumer protection efforts have been split among the agencies and, as a result, got short shrift from them all. "Consumer protection is too important to be the orphan in the regulatory system. It has been everybody's last priority," she said.
The concept for a stand-alone financial protection agency -- modeled loosely after the Consumer Product Safety Commission - was first introduced this year by Sen. Dick Durbin, D.-Ill. But the White House has recently thrown its support behind newer legislation introduced by Rep. Barney Frank, D-Mass. A House committee is expected to debate the measure early next month, while Sen. Christopher Dodd, D-Conn., will soon introduce a companion bill in the Senate.
In addition to pooling all consumer protection efforts into one agency, the law would give the agency broad powers, including the ability to:
- Review new consumer contracts, such as credit card terms of service, and demand changes for clarity.
- Create new mortgage loan disclosure forms.
- Create model versions of contracts that could be used by banks to make offers of credit.
- Force banks to store and share information on products in standard electronic formats, to encourage the creation of third-party products that help consumers compare terms and conditions.
- Impose fines ranging from $1,000 to $1 million per day for violations of the agency's rules
- Require so-called "plain vanilla" offerings of products whenever companies sell complex financial instruments to consumers. For example, the provision -- called "standard consumer financial products" -- could force a bank that's offering a negative-amortization loan to also offer a basic, 30-year fixed loan for comparison.
- Require lenders to compile and share detailed data about financial transactions. The data will be used to analyze market trends and to make sure "traditionally underserved consumers and communities have access to financial services."
- Issue subpoenas to review bank records and investigate complaints.
- Restrict the use of binding, mandatory arbitration by banks.
- Preserve the right of individual states to enact tougher consumer protection laws.
Ed Mierzwinski, program director at the Public Interest Research Group, says broad changes are necessary to prevent abusive bank tactics the led to last year's economic collapse.
"In 1929 we had a collapse of the financial system and in 2008 we had a collapse," Mierzwinski said. "In 1929, we had a radical reconstruction that prevented another collapse for 80 years. Today, Congress hasn't done anything yet except bail out the biggest banks that caused the collapse. We need to start at the bottom and protect consumers."
The proposal faces an uncertain future. President Barack Obama has said creation of the new agency is a top priority for his administration, and the U.S. Treasury Department is behind the plan. But regulators who stand to lose power are much less supportive. And, not surprisingly, industry lobbyists are readying a pitched battle to stop it.
In testimony before Congress earlier this year, the American Bankers Association argued strongly against the creastion of a new agency, arguing that heavily regulated traditional banks were not to blame for the mortgage mess.
"The biggest failures of the current regulatory system, including consumer protection failures, have not been in the regulated banking system, but in the unregulated or weakly regulated sectors," said Edward Yingling, ABA president. "The most pressing need is to close the regulatory gaps outside of the banking industry through better supervision and regulation," he said.
The U.S. Chamber of Commerce is leading the opposition, paying for a series of TV ads and creating a Web site called "StoptheFPSC.com."
"Maybe instead of a bigger government, we should focus on making government better," says one ad.
Critics also argue that separating two chief duties of banking watchdogs –"safety and soundness monitoring," which assesses banks' balance sheets and risk, and consumer protection -- is a recipe for confusion and mismanagement. They envision a situation where the imposition of a consumer protection rule by the new agency, which might decrease bank revenue, could contradict an order by the Federal Reserve to raise capital and lower risk.
"Simply creating another agency isn't going to solve this problem. ...There are already six different entities in the government that deal with consumer protection," said Tom Quaadman, who studies capital markets for the U.S. Chamber of Commerce. "This bill creates a vast new system of government regulation of the economy and sets up competing agencies that will be engaged in turf battles. It's going to make it harder to have a 21st Century regulatory structure for our economy."
He prefers a proposal floated recently by Rep. Walt Minnick, D-Idaho, which would create a "consumer financial protection council" made up of members of existing regulators.
Protecting consumers is good business
But Assistant Treasury Secretary Neal Wolin recently made the case that arguments against a creation of a new, consumer-focused agency "don't hold water."
"In the first place, we reject the notion that profits based on unfair practices can ever be considered sound," he said in an op-ed piece that appear in The Hill. "In the second place, there are few – if any – realistic examples of a true conflict between consumer protection and safety and soundness. And there are no conflicts that could not be easily resolved."
Hillebrand, the Consumers Union expert, goes a step further, arguing that tough consumer protection rules -- rules that would have made many exotic mortgages illegal during the past 10 years – actually make banks stronger, too.
"It turns out that consumer protection would have been the ultimate protection for safety and soundness," she said.
Opponents of the idea have other objections to the bill. Quaadman said the Frank bill goes too far by covering any entity that extends credit, meaning it could apply even to local small businesses that casually allow customers to pay with credit or purchase on layaway, according to the Chamber.
Odysseas Papadimitriou, a former Capital One credit card executive who now publishes CardHub.com, said adding another regulatory agency would still leave the largest flaw of bank oversight intact -- "regulator shopping." Banks can, and do, reorganize under different charters in order to work with more friendly agencies.
"You have a race to the bottom because companies that issue credit cards can choose their regulator," he said. He favors a new structure that organizes regulators by product, so there is a single federal agency that regulates credit cards, another that regulates mortgages, and so on.
"(This bill's supporters) seem to have a very clear understanding of the problem and yet they are choosing the easiest solution. Add one more regulator and problem solved," he said. "That's not how it works."
Then, there's the sheer scope of the restructuring. Not only would the new commission take regulatory duties away from seven other agencies, it would siphon off workers. Hundreds -- if not thousands -- of government consumer protection agency workers would immediately switch hats and work for the new office, an agency transfer that might remind some of the creation of the Department of Homeland Security.
Said one consumer protection agency worker, who spoke on condition of anonymity: "It will take them all two years just to get to know each other. Who will be regulating in the meantime?"
But Hillebrand dismisses such objections, pointing out the severity of the current financial crisis.
"This is a big problem and it's going require a big solution," she said. "There is one thing that is clear here. The mistakes the financial sector made affected real Americans, real neighborhoods. We can't afford to say, 'Let's go back to business as usual.'"
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