This past week, the White House began its push for congressional approval of a sweeping financial regulatory overhaul. Much of the plan deals with big banks, but one part would focus on consumers.
President Obama wants to create a consumer financial protection agency to watch out for the "little guy." For years, consumer advocates have said the federal government needs a single agency to toughen consumer protections and identify bad business practices.
They argue that just as the government imposes safety regulations for cars, toys and medicine, it also should have the power to crack down on harmful financial products. If the government had had a consumer protection agency in the first half of this decade, they say, it could have headed off the proliferation of risky subprime mortgages.
"There's no question we need more regulation," said Travis Plunkett, a spokesman for the Consumer Federation of America, an advocacy group. "We might not be in the (recessionary) shape we're in today if we had had more regulation" of the mortgage market, he said.
The new agency's goal would be to promote fair business practices and make loans more understandable to people without advanced degrees. Clearer explanations might have discouraged many homeowners from getting the subprime mortgages that featured "teaser" interest rates. During the housing boom between 2002 and 2005, many borrowers got mortgages at very low initial rates. Then, after a couple of years, they found their loan terms changed to ever-higher rates, often making foreclosure inevitable.
The new agency also would clamp down on the bank overdraft plans that charge extremely high fees whenever a borrower gets even a very small loan to replenish a checking account. Prepaid bank cards are considered a big problem, too. Consumers Union, publisher of Consumer Reports, says many people don't know the card issuers can impose monthly fees, usage fees, reloading fees, overdraft fees, dormancy fees and even fees to talk to customer service representatives.
The Obama administration says that by creating a single agency, regulators will be able to better detect patterns of problems. Currently, consumer complaints get spread out over many different regulatory agencies. If a single watchdog agency had been in place at the start of this decade, it might have more quickly spotted the risky mortgage-lending practices popping up in hot real estate markets like California and south Florida. Consumer advocates say this might have snuffed out the problem before it spread nationwide and triggered a financial crisis.
But many smaller bankers say the new agency would unfairly burden them. They argue that they didn't cause the financial crisis and shouldn't have to get stuck responding to new and unnecessary regulations.
Karen Thomas, vice president of the trade group Independent Community Bankers of America, told NPR: "Our fear is that the new agency will add a tremendous amount of new burdens. … We have 8,000 community banks now; that's a terrific strength of our economy. And a lot of those banks could be merged out of existence as regulatory burden overwhelms them."