What would a new Consumer Financial Protection Agency do?

President Obama yesterday unveiled his 89-page blueprint for Financial Regulatory Reform. Here's a summary, supplied by the Wall Street Journal, of proposed consumer financial protections:

For regulations protecting consumers and investors, the proposal:

• Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.
• Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.
• Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.
• Creates an outside advisory panel to keep an eye on emerging industry practices.
• Says the new agency should play “a leading role” in educating consumers about finance.
• Gives the new agency authority to ban or restrict mandatory arbitration clauses.
• Improves transparency of consumer products and services disclosures.
• Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.
• Proposes the government “do more” to promote these simple products.
• Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.
• Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.
• Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
• Promotes access to credit in line with community investment objectives.
• Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.
• Requires non-binding shareholder votes on executive compensation packages.
• Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.
• Urges exploration of ways to improve participation in 401(k) retirement plans

While it remains to be seen whether this agency will actually see the light of day, every one of its proposed activities is designed to benefit consumers and individual investors, for whom fine-print disclosure statements and current state and federal safety nets have been insufficient. For an example of the ways lenders, credit card companies and other peddlers of financial services and products take advantage of consumers, check our recent article, "Financial Traps are Flourishing."

Comments

[Pete]

Listen just re-enact the Glass-Stegall Act. No more Federal Agencies or Czars.

[Robert Smith]

This is bad news for American Consumers. At first glance it may seem like this is a good move, but in the end it will limit lending because this agency will remove the reward that lenders traditionally receive when they lend their money. Consumers in return will not be able to receive the credit they seek.

Some may applaud this move, but in the end informed consumers should be able to enter into a transaction with a lender. Keep the government out and keep things simple.

[A F "Bob" Blair Jr]

The precepts of the proposed agency sound noble … especially the point that “the proposal [would] … Beef[s] up the agency’s power to regulate unfair, deceptive and abusive practices”. The agency’s efficacy would depend on who is in the agency. President Bush’s President’s Advisory Council on Financial Literacy (PACFL) was a mellifluous-sounding agency composed of very noble persons who were obligated to the financial industry or U. S. government. Although I submitted “comments” to PACFL (as allowed in the Federal Register before meetings) explaining that when the Truth in Lending Act (TILA) of 1968 was passed, the mathematically-true, compounded [“^”], Effective Annual Percentage Rate (EAPR) was not adopted. The primitive, mathematically-untrue, simple-interest, Nominal APR (NAPR) was adopted … probably as a compromise between advocate’s representatives (Sen. Proxmire and Rep. Sullivan) and the opposition, financial institution’s representatives (Sen. Robertson and Sen. Bennett). At the then low interest rates and monthly payment periods in 1968 the EAPR was close to the NAPR. Now, as noted in Consumer Reports, the February 2009 column, Viewpoint, on a loan to a school principal for $400, which was to be repaid in 16 days with $120 in interest, the APR was 684%. Although the calculation was not shown, it is the NAPR, simple interest, method: (120/400)*365/16)=684.375%. 3 decimal marks are shown because TILA allows up to 1/8 of 1% (1/8% or 0.125%) error in expressing the NAPR. On that loan the mathematically-true, compounded, EAPR is 39,649.596% calculate as ((1+(120/400))^(365/16))-1. The mathematically-true EAPR is not merely slightly over 1 of the 0.125%s from the NAPR, it is over 311,728 of the 0.125%s, calculated as (39,649.597%-684.375%)/0.125%. That is astronomically DECEPTIVE. Changing the law is as easy as replacing in the Act the words “multiplied by” to “compounded for”. Any periodic rate should be the compounded root of the number of periods in a year. The new agency should recommend the change!

[Jay Speer]

This is one of the most important pieces of legislation in a long time. Consumers are not in a fair fight when they go into the lending market because the lenders are so good at tricking and trapping. See Professor Warren describe the need for this: http://www.youtube.com/watch?v=g-slbqZvMgs

See the above comment: "remove the reward that lenders traditionally receive when they lend their money." If you mean, it will stop predatory lenders from charging 350% interest on their loans--yes, it will probably remove that reward.

[Winston]

A new regulatory agency may or may not prevent some consumers from making foolish decisions. It may or may not prevent unscrupulous businesses from taking advantage of public credulity and may or may not replace innovative financial products with government-approved gruel. What is certain is that creating a CFPA would ensure that a great many NGO and industry lobbyists have plenty of work for years to come.

[pammaks]

Be careful to not allow Barney Frank to appear as if he is actually trying to protect the taxpayers

People in the financial community are excited that he is "educating" members of the House behind the scene of the importance of the Federal Reserve's independence...ie, it is none of the taxpayers business what they have done with or what they will do with the $14 trillion taken from the taxpayers and allocated to the companies (ie, Goldman Sachs, BofA) that created this financial fiasco.

These financial professionals are working hard through their lobbyists to preserve the Federal Reserves independence. The public needs transparency and we need Barney Frank's support of Ron Paul's bill to audit the Fed....not allow them to remain independent and free to steal from the taxpayer.

We need the media to focus on educating the public on the two bills before the House (HR 1207) and the Senate (S 604) to insist on an audit of the Federal Reserve. I think things are worse than the public has any knowledge of and we need to know where our money has gone. Stop protecting Goldman Sachs, expose their corrupt behavior, their obscene profits and salaries after being bailed out at the expense of the taxpayer.

The investment bankers wrote an open letter to the executive branch of the govt expressing that the "independence of the Fed is essential to the monetary policy of the United States." Essential to continue to rape the American public while the investment banks and the Federal Reserve line the pockets of their financial buddies at Goldman Sachs and the other investment banks...

Transparency and a complete audit of the Federal Reserve are in order and the American public is demanding it....

If this new agency is controlled by the Fed we are in more trouble...

[Michael Compton]

Well said, Jay Speer.

People - please - do NOT listen to the 'Gosh-this-seems-like-a-good-idea-BUT...' crowd. Take a little time and do some independent research - and PLEASE pay close attention to where your information is coming from. For example, check the 'about us' link on any page you visit - if it some random foundation, find out who is funding that foundation. There is a lot of information laundering on the net, and many seemingly 'independent' voices are actually the paid PR flacks of the industries in question.

This will be GOOD for the consumer, and BAD for predatory business practices (More from Professor Warren here: http://baselinescenario.com/2009/07/21/three-myths-about-the-consumer-financial-product-agency/). We need this!

I agree with half of your message, Pete - It is absolutely crucial that we reenact Glass-Steagall. It was criminal to repeal it in the first place (which is why i find the 2nd half of your comment so puzzling - you recognize the need for regulation, yet decry the creation of an agency whose mission will be to protect consumers. I don't get it).

A lion's share of the blame for our current mess lies directly at the expensively-clad feet of former Sen. 'Foreclosure' Phil Gramm: http://www.motherjones.com/print/15479 . Quite simply, on a quantifiable, practical level, the man destroyed our economy (with significant help from BOTH parties). THAT is what happens when we deregulate. When did we as Americans forget that it is unwise to let the foxes guard the henhouse? It is such basic common sense....It baffles me that industry is able to spin us into thinking that they are responsible enough to police themselves. How many times will we get the shaft before we learn this lesson? I thought the Savings and Loan scandal would do it, but....Here we are again, with people like Phil Gramm and 'Robert Smith' again telling us that 'everything is fine...Leave industry alone'. Well that's just nonsense....Dangerous, disingenuous nonsense.

[Heather]

This is a bad idea people! You have to look beyond the major banks and mortgage companies. There is an entire industry of consumer finance that cease to exist. I am not refering to payday loans or title pawn. This part of consumer finance does small installment loans. In some places if you borrow around $200 you pay back around $275 in a 5 month period. If you unfairly calculate this at an annual percentage rate it will seem crazy high. But if you need that extra $200 because you have an unexpected medical expenses or car repairs or some other emergency, all of a sudden that doesn't seem like a bad deal. This may seem unfair to those that can afford those unexpected emergencies and expenses but what about those of us that can't? I am a single mom and I make around $30,000 a year. If my car breaks down I do not have anyone I can borrow $500 from. I don't have rich parents or a savings account account. The banks don't loan small money like that. So where do I go if this CFPA gets passed? This doesn't just impact big business and finance. But whose going to protect us from this ever growing government??

[Heather]

By the way - If you really want to educate yourself on this issue, look at both sides.
www.nilaonline.org

[Jeremy]

Great regulation to implement. The basic question is would you rather continue to get ripped off by the guys on Wall Street, or have the government come in and apply some structure (unfortunately bureaucratic in nature) for you to get ripped off less. I vote for the latter and think this is not only a good idea, but paramount to avoid another banking melt down from the greed hungry banking CEO's figuring out ways to steal from the masses and when they get caught still getting rich from our tax dollars bailing them out...sheesh! You should applaud this regulation as you will be doing a favor to yourself.