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Consumer Financial Protection Agency: an overview
Healthcare reform has drawn most of the attention on Capitol Hill lately, but for home buyers, sellers and mortgage applicants, the legislative ballgame will really get underway in September, when Congress begins serious work on the proposed Consumer Financial Protection Agency.
Legislation creating the agency is pending in the House, pushed by Financial Services Committee Chairman Barney Frank (D-Mass.), who is its principal author. The Obama administration had outlined a similar plan at the end of June and considers passage of a bill a priority.
Why should you care? What might the agency do for you -- or to you? Here's a quick overview:
To begin with, be aware that the agency's powers and oversight would extend far beyond mortgages and real estate -- into all credit cards, debit cards, consumer loans, payday loans, credit reporting agencies, debt collection, stored-value cards and even investment advisory and financial advisory services, to name only part of the list.
It would have the authority to alter long-common practices that nettle consumers, such as mandatory arbitration clauses in the fine print of contracts that automatically send business-consumer disputes to arbitrators rather than to courts. The agency could ban or limit such clauses in specific products if they are shown to tilt against consumers' interests.
The agency would write the user-safety rules for virtually all consumer financial products and would have the legal firepower to levy huge fines -- tens of thousands of dollars a day per violation in some cases -- and prosecute lenders, brokers and others who break the rules.
The agency would be the dominant federal consumer protector in all home real estate settlements. It would regulate "affiliated" title, escrow and financing businesses connected with realty firms and builders. It would oversee equal credit opportunity and fair housing, and would set standards for all mortgage offerings, whether from the biggest national banks or the smallest local brokers. Generally it wouldn't seek outright bans on mortgage products that carry elevated risks -- interest-only loans, for instance -- but would require that lenders restrict such mortgages to well-informed applicants who can document that they understand the risks and can afford the payments.
Within its first year, the agency would be tasked with creating consumer-friendly, uniform disclosures for all home purchase and financing transactions, starting with a combined "good-faith estimates" and truth-in-lending statement.
The core idea behind the proposal, supporters say, is to pull together consumer oversight powers that are now scattered among various agencies, and to put consumer interests where they should be -- much higher on the priority list than they were during the years leading up to the housing and credit bubble and bust.
Banking and mortgage trade group leaders generally agree that the existing regulatory system failed badly -- for consumers and the industry itself.
"Are reforms needed? Yes, absolutely. We're in favor of better consumer protection," says Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents major mortgage originators and banks. How to go about achieving those reforms is where Canfield's group and others part company with the administration and consumer supporters.
Canfield and other industry lobbyists are concerned about any radical shake-up of the way banks and mortgage companies traditionally have been overseen by the federal government. Currently the regulators responsible for checking on banks' "safety and soundness" also are empowered to look for risky, discriminatory or anti-consumer practices and products at those institutions.
Handing over consumer protection and enforcement powers to a separate agency that might not understand the business side of the ledger could be burdensome for lenders, they contend, and could add extra layers of bureaucracy and nightmarish legal liabilities. Mortgage Bankers Assn. President John Courson says the agency could "stifle innovation" and limit consumers' choices in home loans and other financial products.
But proponents such as Harvard Law School professor Elizabeth Warren say the industry's criticisms about stifling consumers' choices and reshaping banking industry regulation are simply efforts to preserve the status quo.
"If the status quo is about choice," Warren says, "then explain why half of those with subprime loans 'chose' high-risk, high-cost loans when they qualified for prime mortgages. The truth is, no consumer 'chose' to accept the tricks and traps buried in the legalese of financial products." She says they were steered to those loans by lenders, brokers and Wall Street promoters who were not required by regulators to explain the risks to their customers.
Outlook for the bill: Passage in the House appears likely. Count on the banks to mount their biggest battles in the Senate.
Distributed by the Washington Post Writers Group.