President Obama says the safeguards against unfair lending in the new financial regulation overhaul he signed into law Wednesday will benefit not just consumers but the economy as a whole. That's because the same risky lending that put consumers in jeopardy of losing their homes eventually sent shock waves all the way to Wall Street.
Car dealers fought to be exempt from the new bureau’s oversight, and they won.
"I can remember meeting in 2006 in the summer with top management of New Century," said Mike Calhoun, president of the Center for Responsible Lending, referring to a big subprime lender. "We said all of our data shows these mortgages are not sustainable. And, somewhat to our surprise, they agreed."
Calhoun said that with Wednesday's bill signing, the nation has a way to stop such reckless lending.
Oversight Of 'Shadow Bankers'
The law is designed to protect consumers not only from over-aggressive banks but also mortgage brokers, check-cashers and payday lenders, which were lightly regulated until now. One goal is to bring these so-called "shadow bankers" out into the sunlight.
"More than two-thirds of the subprime lending, for example, in mortgages was done by non-banks," said White House economic adviser Austan Goolsbee. "There's going to be consistent regulation applied across everybody. So it doesn't matter who you are. It matters what you're doing."
The law sets up a new bureau within the Federal Reserve to police all kinds of lenders. Unlike bank regulators tasked with multiple responsibilities, this bureau will have just one job: protecting consumers.
"And everybody will know if something's going wrong. Here's where you go. You go to the consumer protection agency," Goolsbee said. "They're going to have their rear in the seat — the hot seat — to be held accountable."
Groups like the U.S. Chamber of Commerce warn the law creates uncertainty for businesses, discouraging them from hiring workers. But Obama insists that reputable companies have nothing to fear from the new rules. More than two years ago, Obama argued on the campaign trail that failure to protect consumers ultimately hurts business as pain "trickles up."
"It's not anti-market to be for stronger oversight," Goolsbee said. "The lack of oversight and ripping up rules of the road so people lose trust is bad for business. It led to the crisis. And that has to be changed."
Car Dealers Excluded
The new law represents the biggest change to financial rules in decades. But it largely excludes one group of lenders: Car dealers fought to be exempt from the new bureau's oversight, and they won.
"It's a huge loophole because auto lending is second only to home mortgages and bigger than credit cards," said Rosemary Shahan, president of a California-based consumer group that specializes in cars and car loans.
She said some of the risky lending practices that plagued the sub-prime mortgage industry can also be found on the nation's car lots.
"In fact, there are some folks that will tell you that those practices started with auto and spread to home mortgages: The falsified loan applications, getting people into loans they couldn't afford, securitizing everything and spreading risks throughout the financial system," Shahan says.
Car dealers aren't entirely off the hook. The new law gives the Federal Trade Commission additional power to crack down on dealers if it finds unfair practices.