Congress Begins To Overhaul Consumer Protections

Overshadowed this week, but not forgotten on Capitol Hill: the first piece of President Obama's ambitious plan to overhaul the financial system. Treasury officials have sent draft legislation to Congress on a key piece of that plan.

It would create a one-stop financial protection agency for consumers, with authority over financial products from credit cards and home mortgages to payday loans. Proponents say the measure would stop people from getting mortgages, for example, that they don't understand and can't pay for. Opponents say the new entity would create unnecessary bureaucracy and shrink consumer choices.

Committees on both sides of the Capitol started working on the legislation this week. The Senate banking committee heard from Assistant Treasury Secretary Michael Barr. He said that even with half a dozen regulators out there, the system has major gaps.

"The present system of consumer protection is not designed to be independent or accountable, effective or balanced," Barr said. "It is designed to fail."

Barr said part of the problem leading to the financial crisis was that banks could shop around for the most lenient supervisor, and some financial institutions could avoid supervision altogether. Regulatory authority is divided among so many agencies, he said, that each can avoid stepping up to address problems. At the hearing, Barr presented a plan to roll the regulation of consumer products into a brand-new Consumer Financial Protection Agency.

"It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion," he said. "It is time for an agency that consumers and their elected representatives can hold fully accountable."

The new agency would write the rules for credit cards, retirement accounts, mortgages and more. It could ban practices it deems unfair, demanding, for example, that agreements be written in language consumers can understand. Most importantly, it would place consumer protection under one roof. Sen. Bob Corker (R-TN) says it all goes too far.

"This is an example of all examples of this administration being Big Brother," Corker said.

Corker said he objects to a provision that would require banks and others to offer so-called vanilla versions of their loans. For example, a bank that offers a complex adjustable rate mortgage would also be required to offer customers a fixed-rate version. It would be the same for cars, credit cards and student loans.

"I think this is a tremendous overreach ... where the federal government is telling citizens the types of products they should and shouldn't buy, and telling companies what they should and shouldn't offer," he said. "This is way out of bounds."

Alabama Sen. Richard Shelby, the top Republican on the banking committee, wanted to know what happened to the idea of consumers shouldering responsibility for their own financial decisions.

"Risk cannot be eliminated from our financial markets," Shelby said. "It's risk-taking that generates return. It would be both false and irresponsible to lead the American people to believe that an enhanced regulator can provide them with risk-free opportunities."

The American Bankers Association also opposes the plan, saying it will prompt its members to drop riskier loan offerings out of fear of the new bureaucracy. They say that could limit credit all around and shrink consumer choices.

All sides will have many more opportunities to make their case. Across the Hill, the House Financial Services Committee is holding two days of hearings this week. And the legislation is expected to take the better part of a year to make its way through Congress.

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