At its core, President Obama’s overhaul of regulations for the financial industry seeks a fundamental change: Make the federal bureaucracy work for consumers, not just Wall Street. And Wall Street, not surprisingly, doesn’t like it.
Striking a populist tone, Obama complained in a White House speech Wednesday that average Americans were often baffled by such intricacies as the terms of credit cards, home loans and other financial products. That confusion helped fuel the subprime mortgage meltdown that sent the U.S. and foreign economies reeling.
Much of his reform package involves complex changes to the inner workings of the financial system, but Obama said that better consumer protection -- a priority -- was a key to avoiding future financial crises.
Such safeguards could reach far down the line to such everyday matters as bank overdraft protection. A new agency would have the power to write federal rules that, for instance, prohibit prepayment penalties on loans, require better disclosures, order financial companies to offer easily understood options, and levy fines and penalties for lenders that don’t comply.
“The most unfair practices will be banned,” Obama said. “Those ridiculous contracts with pages of fine print that no one can figure out, those things will be a thing of the past. And enforcement will be the rule, not the exception.”
Consumer groups hailed the plan.
“This is a dramatic shift in the focus of financial regulation, which should lead to a credit marketplace which is easier for consumers to understand and safer,” said Travis Plunkett, legislative director for the Consumer Federation of America.
But banks and other Wall Street firms that earn billions of dollars on consumer financial products quickly attacked the proposal, setting the stage for what is likely to be a hard-fought legislative battle.
“We intend to take our case to Congress to explain why we believe adding new layers to a broken regulatory system is not the answer,” said David Hirschmann, president of the Center for Capital Markets at the U.S. Chamber of Commerce.
The emphasis on consumer safeguards is part of the blueprint Obama unveiled formally Wednesday for the most dramatic changes in financial rules since the Great Depression.
It calls for tough new requirements on companies whose failure would threaten the economy, new oversight of complex financial derivatives and stepped-up rules for hedge funds and private equity firms.
One of its most controversial provisions is the creation of an independent Consumer Financial Protection Agency, which would assume the watchdog duties now spread across several regulatory agencies and that administration officials say are often ignored.
“It is an indisputable fact that one of the most significant contributors to our economic downturn was an unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess,” Obama said.
Consumer protection now is fragmented, creating major gaps in oversight and inattention to those issues by regulators who “see the world through the lenses of institutions and markets, not consumers,” according to the administration’s 85-page regulatory reform plan.
The plan noted that federal regulators waited until December 2005 to propose warnings for consumers about subprime mortgages, which are home loans made to borrowers with little or no credit or bad credit.
The proposal, though, wasn’t made final until June 2007, well past the time when the worst of those loans were written. One of the powers of the new consumer protection agency would be to set new rules for home lending, “so that the bad practices that led to the home mortgage crisis will be stamped out,” Obama said.
The agency’s reach could have a palpable effect on the everyday financial lives of millions of Americans, experts said, potentially extending to products such as car loans and even gift cards.
“Even the most financially astute” consumers can have trouble deciphering increasingly complex financial products, the administration said. The plan would require “clear and conspicuous” disclosure of costs and risks.
The administration has made passage of the regulatory reform plan a priority and tried to roll it out as quickly as possible, hoping Congress could pass it this year. But supporters are concerned that the issue has lost momentum as the economy has shown signs of improvement.
Treasury Secretary Timothy F. Geithner begins the sales job on Capital Hill today with testimony at House and Senate hearings. Key lawmakers said they would work with the administration on the reforms. Congressional committees are likely to make many changes.
Democrats appear to support the effort to increase consumer protection, but agencies losing those powers, along with business lobbyists, are expected to fight the creation of the new watchdog agency. Many Republicans and Democrats also balk at increasing the power of the Federal Reserve, which they said failed to identify the warning signs of the deep recession.
Consumer advocates hailed Obama’s proposal and the new watchdog agency as a wholesale shift in federal policy.
“This will be a go-to agency for Joe and Jane Consumer on the street,” said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group. “When they have a problem, they’ll be able to call this agency.”
But business groups said such an agency would exacerbate the bureaucracy that consumer groups and others agree has hamstrung regulation over the years.
“You’ll have much more effective consumer protection if you make current regulators stronger and much more effective at consumer protection than if you bifurcate the system and put consumer protection in a different place,” Hirschmann said.
In addition, banks could get mixed signals if directives from the consumer agency conflict with those of another regulator that is concerned with an institution’s safety and soundness, said Steve Bartlett, chief executive of the Financial Services Roundtable, a trade group.
For example, a consumer agency could oppose high interest rates charged on loans while another regulator could favor them as a way to improve an institution’s financial stability, Bartlett said.
“The consumer protection agency is probably our largest concern at this point,” he said.
But Plunkett of the Consumer Federation said banking regulators had dismissed consumer interests as running counter to the primary goal of preserving the safety and soundness of the institutions.
“Regulators often acted like if they restricted a particular financial institution in any way from offering any kind of financial product, it might negatively affect the bottom line . . . that was the culture,” he said. “We need an agency with a different mind-set and a different culture.”
Business interests are likely to find a sympathetic ear among Republican lawmakers, who were critical of the plan for increasing government involvement in the marketplace.
“The American people don’t want Washington to get more involved in the private sector; they want an exit strategy to get Washington out of the bailout business,” House Minority Leader John A. Boehner (R-Ohio) said.
The agencies that now share consumer responsibilities also are expected to fight against the loss of their power. Indeed, the Securities and Exchange Commission appears to have won a turf battle by preserving its oversight of mutual funds, one of the most popular consumer financial products.