Bloomberg , American Banker (need a subscription) and Politico are reporting that tomorrow President Obama will release a 85 page plan for reforming the regulation of banks and credit. The reports are saying that the President's plan will include a Consumer Financial Protection Agency (CFPA) designed to write fair rules for all types of consumer financial product. This is similar to the idea known as the Financial Product Safety Commission (FSPC).

On the Wall Street side, the plan is expected to include a way to address “systemic risk” –when financial practices threaten the whole financial system. It will have “resolution authority” for unwinding important non-bank entities instead of propping them up with government money or letting them fail in a way that might bring down other parts of the financial system. Reports also say that the President will seek a new requirement that lenders and brokers who make a mortgage keep part of the risk, to avoid the return of the business model where people on Wall Street made money by making bad loans. These are all steps that Consumers Union has previously endorsed. (March 3, 2009 letter (PDF) to the President on regulatory reform and our March 24 testimony pdf)

The plan doesn’t look at just the “big guys” – those complicated Wall Street arrangements that paid bankers and brokers to make confusing and unsuitable loans that the borrowers couldn’t repay.

The President’s plan has something for all of us on Main Street – permanently better consumer protection against rip-off loans, deceptive bank pricing, and unfair features in financial products. The President has proposed a “Consumer Financial Protection Agency.”
We need a Consumer Financial Protection Agency to address products and practices like these:

Mortgages with low “teaser rates,” skyrocketing later interest rates, and prepayment penalties that stop borrowers from refinancing when the rate goes too high.

Overdraft loan plans that automatically loans money to cover a debit card purchase when there is not enough money in the checking account, with a fee that is actually higher than the average amount of the overdraft covered.

Prepaid bank cards that are loaded with monthly fees, usage fees, reloading fees, overdraft fees, dormancy fees and even fees to talk to customer service.

Of course, the banks are already gearing up to fight these new protections. Today’s American Banker describes the proposal: “the agency would be independent and would work to ensure transparency, simplicity, fairness, accountability and access to protect consumers in the areas of credit, savings and payment markets.” The American Banker predicts “a fierce battle over the effort to eliminate charters and create a consumer protection agency with power over banks.”

Mutual funds, investment oversight, and insurance regulation aren’t expected to be moved to the new agency. These financial products are very important, but also are very different from mortgages, loans, bank accounts, and non-bank financial products such as gift cards.

Here is why Consumers Union supports a Consumer Financial Protection Agency:

• The CFPA’s job will be to ensure that credit, deposit and payment products and services and related products and services, are being offered in a fair, sustainable and transparent manner. The job will include quick response to emerging harmful practices, before they spread throughout the country or become large enough to undermine family economic stability or threaten the economy.

• The CFPA can address all forms of credit, deposit, and payment products and services offered to consumers or to small businesses. It can also address related products and services such as prepaid debit cards, loan servicing, debt collection, debt-related services.

• Giving the CFPA the power to issue rules to set standards to address rapid evolution and changes in the marketplace will protect honest competition, consumers, and the economy. This will also protect consumers when the technology and design of new financial products outstrips the existing consumer protection laws.

• The CFPA can bring into one federal agency the job of writing consumer protection rules under a large number of existing federal statutes, and the job of writing rules for harmful or deceptive practices that should be outlawed or restrained.

• The CFPA should have the power to determine that products, features, or practices are unfair, deceptive, abusive or unsustainable. Its powers should include banning, restricting, or imposing conditions on practices, products or features, creating product standards, and requiring special monitoring, reporting and impact review of certain products, features or practices.

• Importantly, this new federal agency won’t stop states from protecting their residents, or consumers from protecting themselves. Individuals, State Attorneys General, existing state and federal financial regulators, and the new agency must each have the ability to enforce consumer protection rules and laws administered. State law will not be pre-empted or displaced. States could also develop and apply new consumer protection rules.

Come back tomorrow, we will give you another post that tells what the Treasury Department’s 85 page plan means for you.

If you want to show your support for a strong federal agency to protect financial consumers, l click here.