Legal, Regulatory, and Privacy Issues

New agency would oversee credit cards, financial services


The Obama administration proposes creating a Consumer Financial Protection Agency as a consumer watchdog for credit cards and other complicated financial products.

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The Obama administration wants to create a consumer watchdog agency focused on protecting Americans from abusive, deceptive and unfair financial products — including credit cards.

“This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want — and actually understand,” President Obama said Wednesday in proposing the creation of the Consumer Financial Protection Agency. If approved, it would create a new, consumer-oriented federal agency with power over the existing patchwork of laws and regulators that currently oversee credit cards and other financial products.

When it comes to credit cards, at least five different federal agencies have jurisdiction over issuers and consumer groups have long complained that none of them does an adequate job of policing banks or protecting consumers (See Summary: What the new agency would mean to credit cardholders.)

The new agency’s portfolio

Among other things, the proposed consumer protection agency would:

  • Monitor credit card issuers for unfair, deceptive or abusive practices.
  • More quickly adopt new credit card reforms, as needed, to address new industry products or practices that might arise.
  • Set standards for “reasonable” disclosures of credit card terms that are clear, concise and simple.
  • Act as the primary regulatory agency for existing consumer laws, notably the recently enacted Credit CARD Act of 2009, the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Debt Collection Practices Act.
  • Work with other state and federal agencies to enforce consumer protection laws.
  • Allow states to adopt and enforce stricter consumer laws than those adopted on the federal level.
  • Review for fairness mandatory binding arbitration clauses — standard in most credit card contracts — and, if needed, ban them.

The agency would not be limited to overseeing banks, but also cover any company that provides financial services for credit and debt, including debt collectors, debt buyers, credit repair agencies, retail stores and brokerage houses.

A credit card regulator

Consumer advocates applauded the plan, which they said was long overdue.

“For credit cards, eliminating forced arbitration clauses is a biggie, but so is having an actual regulator. What a concept,” said Ed Mierzwinski, consumer program director for the U.S. PIRG consumer group.

Obama said under the new agency, “Consumers will be provided information that is simple, transparent and accurate. You’ll be able to compare products and see what’s best for you. The most unfair practices will be banned. 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.”

The new agency is part of a broad and far-reaching proposal to revamp the nation’s troubled financial markets by adding oversight, consumer protection and transparency to regulation. Were these measures in place three years ago — when the subprime mortgage market took off with little or no federal regulation — much of the Wall Street meltdown may have been avoided, Obama and consumer groups suggested.

“Those ridiculous contracts with pages of fine print that no one can figure out — those things will be a thing of the past.”

What’s next?

White House release of the proposed financial regulatory reforms (in an 89-page report) is the first step in what could be a long, political battle. Congress must now review and sign off on the plan. U.S. Sen. Christopher Dodd, chairman of the Senate banking committee, began hearings on the proposal June 18, 2009, on Capitol Hill with testimony from Treasury Secretary Timothy Geithner. The House Financial Services Committee has scheduled a June 24, 2009, hearing on the plan. Discussion, debate and revisions of Obama’s plan could continue through the end of the year as the measure winds through the U.S. House and Senate.

The powerful banking and financial services industry lobby — who “frankly own the place,” as Democratic Sen. Dick Durbin of Illinois said in a widely quoted Chicago radio interview in April — fired the first shot at Obama’s plan hours after its release.

Bank opposition

“We believe the administration’s proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets and among financial regulators while it is pending,” Edward Yingling, president and CEO of the American Bankers Association (ABA) trade group, said in a statement. “It needlessly rips apart all the existing regulatory agencies, eliminates charter choices and creates a new agency with powers to mandate loans and services that go well beyond consumer protection.”

He added: “ABA will advocate for legislation that focuses on creating a systemic regulator, providing a strong mechanism for resolving troubled systemically important firms and filling gaps in the regulation of the shadow banking industry. Such significant legislation would address the principal causes of the financial crisis and constitute major reform.”

John Berlau, a financial policy expert for the Competitive Enterprise Institute, a public interest group that advocates limited government, said creating a finacial protection agency could undermine Obama’s goal of curtailing systemic risk. “A banking agency devoted exclusively to consumer protection could develop myopia and ignore overall risks to the financial system, the very purpose of the Obama plan,” Berlau said in a statement.

Mierzwinski, a longtime consumer advocate, acknowledged the fight ahead. “Even with support of Obama, Dodd, [House Financial Services Committee Chairman Barney] Frank and our new coalition — — we’ll still have to work hard against the people that caused the worst economic meltdown ever and now claim that only they can fix it, but we will get it done.”

Addressing regulatory lapses

Michael Calhoun, president of the Center for Responsible Lending consumer group, said the new consumer agency would come at the right time to help families.

“As our country grapples with the current financial meltdown and its epidemic of foreclosures that have crippled the economy, we must address the regulatory lapses that brought us here,” Calhoun said in a statement. “At the same time, we must protect consumers through targeted laws such as the credit card legislation Congress recently passed and the pending legislation that addresses predatory mortgage lending and abusive interest rates on small loans.”

Calhoun added: “We strongly support the position that states must be free to make and enforce laws that are even stronger than those set by the federal agency when they determine that’s necessary to protect their own residents.”

“The administration’s proposal is so vast and controversial that it will be extremely difficult to enact.”

Dodd, whose Senate committee has already held 15 hearings on regulatory reforms needed to prevent another financial meltdown, said: “The proposal President Obama laid out today sets the stage for what will be a historic undertaking — building the foundation for a safer, stronger financial system. Consumer protection must be at the center of this effort, and I applaud the president for making an independent consumer financial protection agency one of the pillars of his proposal.”

Obama said the fault of the credit crisis rested not only with financial institutions but with consumers as well: “It was also the result of decisions made by ordinary Americans to open credit cards and take out home loans and take on other financial obligations.

“We know that there were many who took out loans they knew they couldn’t afford, but there were also millions of Americans who signed contracts they didn’t always understand offered by lenders who didn’t always tell the truth,” Obama said. “Even today, folks sign up for mortgages or student loans or credit cards and face a bewildering array of incomprehensible options. Companies compete not by offering better products, but more complicated ones, with more fine print and more hidden terms.” (Read Obama’s entire speech.)

See related:  Summary: What the new agency would mean to credit cardholders

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