The Obama administration recently sent legislation to Congress to create a Consumer Financial Protection Agency that would oversee consumer bank and credit products, taking away such power from the banking regulators who have been criticized for failing to prevent abuses in the mortgage and credit card markets. The idea is to prevent a repeat of the past decade, in which unregulated mortgage brokers sold subprime, adjustable-rate mortgages to consumers who lacked the resources or the knowledge to use them wisely.  The agency would protect people from “unsafe” mortgages the same way that the Consumer Product Safety Commission protects them from faulty toasters.
It could be wise to streamline the consumer protection function by taking it away from agencies whose other responsibilities may have conflicted with it. The Fed, which had both consumer protection and bank solvency duties was too slow to rein in subprime loans. Another useful focus of such an agency would be simplifying the eye-glazing disclosure forms borrowers now face when they buy a house or sign up for a credit card. The agency would have the power to impose fines and refer for criminal prosecution those who engage in unfair, deceptive or abusive acts.  It would be able to act when it reasonably concludes the product in question would likely cause “substantial injury” to consumers.
As for mortgage regulation, the agency would have to propose within one year a mortgage disclosure form that would combine requirements under the Truth In Lending and Real Estate Settlement Procedures acts, which banking regulators and HUD have struggled for years to do. In addition, the agency could ban mandatory arbitration in financial contracts, a win for consumer advocates, which has been pushing Congress to roll back such contracts that have become more ubiquitous for consumer purchases.
The House Financial Services Committee is slated to mark up its Consumer Financial Protection Agency legislation before the August recess, while the Senate Banking Committee plans to incorporate its bill into a larger overhaul measure this fall.
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