The President’ today released his comprehensive plan to fix the oversight of financial products and markets and said what we all know – financial oversight in the U.S. failed. We are all paying the price for the financial meltdown that started with bad mortgages and spread throughout our economy.
The new plan is complicated, but the ideas are simple. It responds directly to the gaps that allowed the problems in financial services to get so big.
The President’s financial reform plan:
- Gives a federal agency the job of looking out for financial consumers: A key problem leading up to the mortgage meltdown is that no one was looking out for consumers. The President has called for Congress to create a new Consumer Financial Protection Agency. The new agency will write the rules under the existing laws; plug the holes in current law to promote fair practices and understandable financial products; handle consumer complaints; and promote the development of products that consumers can understand and use safely. More on how this will work.
- Brings back the states to look out for financial consumers: States were stopped from consumer protection by a series of interpretations and rules by the federal Office of the Comptroller of the Currency. The new plan recognizes that consumer money problems may start locally, and it allows states to enforce the new federal rules and their own rules to protect their residents from financial rip-offs in credit, bank accounts, and payments.
- Ends the practice of banks picking their federal regulator: The plan asks Congress to create one federal regulator for all nationally chartered financial institutions. The new agency would replace the current Office of Comptroller of the Currency and Office of Thrift Supervision with a new National Bank Supervisor. It would eliminate special charters such as for thrifts and for industrial loan companies. Many of the larger thrifts have disappeared in the post-meltdown marketplace, and having very similar charters for banks and thrifts allowed financial institutions to pick their own federal regulator by picking their charter. (Credit unions would stay under their current regulator.)
- Stops the fee frenzy and encourages sound lending: Part of what fueled the pre-meltdown boom in complicated mortgages was that lenders could make big fee income on loans even if the loan wasn’t likely to be repaid. The plan calls for federal banking regulators to develop regulations that require lenders and sponsors of pools of mortgages that are bundled and sold to keep part of the “credit risk.” If the loan goes bad, the lender loses some of its own money. This should help eliminate the business model where people on Wall Street made money by making bad loans. Consumers Union has supported both this type of “skin in the game” requirement and also a requirement for continuing legal responsibility for a loan for each entity that makes or purchases that loan or a security based upon the loan.
- Makes the gamblers put more of their own money on the table: When the mortgage deals started unraveling, it became clear that some of the players in the financial system just didn’t have enough capital to withstand the losses created by their own conduct and by the conduct of others with whom they had chosen to do business. Under the plan, every company that owns a bank, plus other companies whose failure could threaten the U.S. financial system, will be subject to strong “capital requirements.” In other words, these companies will have to put up their own money to back their bets in the financial system. A Council of regulators will have to develop standards to identify the types of non-bank companies that should be subject to these rules. The Federal Reserve Board would get the job of deciding which individual non-bank owning companies meet the standards and will enforce capital requirements for all financial holding companies.
- Creates specific responsibilities to looking at the safety of the financial system as a whole: After the meltdown, it became clear that the federal government needed to pay much more attention to the development of risks across the financial system. Some practices that might be legal and even business-smart in the short term for one company, create too much risk to that company and others when copied widely throughout our financial system. The plan calls for a Council of regulators, called the Financial Services Oversight Council, to identify emerging risks and types of firms that pose special risks. It gives specific new oversight responsibilities, described above, to the Federal Reserve Board for certain types of systemically important entities.
- Creates a system to unravel particularly important financial entities: The taxpayer bailout happened partly because there was no system to unwind a non-bank firm that could threaten the financial system if it failed, because of its connections to other firms. The plan includes a “resolution authority” for unwinding important non-bank entities instead of propping them up with government money or letting them fail in a way that might bring down other parts of the financial system. There is a system with checks and balances in which the Treasury Department would determine when this special authority needs to be used. The Treasury Department could appoint the FDIC, the same agency that unwinds banks, to handle the resolution of an important non-bank firm.
More on the consumer protection aspects of the plan.
The President’s Treasury Department plan says that the Consumer Financial Protection Agency will have the “authority and accountability to make sure that consumer protection regulations are written fairly and enforced vigorously.” A goal will be to “promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and services.” In today’s announcement the President put it even more directly when he said that we need, “transparent, fairly-administered rules of the road that protection American’s consumers and our economy from the devastating breakdown that we’ve witnessed in recent years.” He stated goals we should all be able to agree upon: “honest, vigorous competition,” and “to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed.”
The Consumer Financial Protection Agency is essential to serve those goals. The Consumer Financial Protection Agency is similar to the idea known as the Financial Product Safety Commission (FSPC).
The CFPA can address products and practices like these:
- Mortgages with low “teaser rates,” skyrocketing later interest rates, and prepayment penalties that stop borrowers from refinancing when the rate goes too high.
- Overdraft loan plans that automatically loans money to cover a debit card purchase when there is not enough money in the checking account, with a fee that is actually higher than the average amount of the overdraft covered.
- Prepaid bank cards that are stacked against the customer with monthly fees, usage fees, reloading fees, overdraft fees, dormancy fees and even fees to talk to customer service.
Here is why Consumers Union supports a Consumer Financial Protection Agency:
- The CFPA’s job will be to ensure that credit, deposit and payment products and services and related products and services, are being offered in a fair, sustainable and transparent manner. The job will include quick response to emerging harmful practices, before they spread throughout the country or become large enough to undermine family economic stability or threaten the economy.
- The CFPA will address all forms of credit, deposit, and payment products and services offered to consumers. It can also address related products and services such as prepaid debit cards, loan servicing, debt collection, and debt-related services.
- The CFPA will have the power to issue rules to set standards even as products are rapidly changing. This will protect honest competition, consumers, and the economy.
- The CFPA will be one federal agency with the job of writing consumer protection rules under a large number of existing federal statutes, and the job of writing rules for harmful or deceptive practices that the current laws never contemplated, but that should be outlawed or restrained.
- The CFPA will have the power to determine that products, features, or practices are unfair, deceptive, abusive or unsustainable. Its powers should include banning, restricting, or imposing conditions on practices, products or features, creating product standards, and requiring special monitoring, reporting and impact review of certain products, features or practices.
- Importantly, this new federal agency won’t stop states from protecting their residents, or consumers from protecting themselves. Individuals, State Attorneys General, existing state and federal financial regulators, and the new agency must each have the ability to enforce consumer protection rules and laws. States could also develop and apply new consumer protection rules.
Mutual funds, investment oversight, and insurance regulation aren’t expected to be moved to the new agency. These financial products are very important, but also are very different from mortgages, loans, bank accounts, and non-bank financial products such as gift cards. The plan calls for rulemaking by the SEC on several key investor issues, including mutual fund protections.