New Law Protects Consumers From Non-Bank Lenders The new financial regulations signed into law Wednesday are designed to protect consumers from 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.

New Law Protects Consumers From Non-Bank Lenders

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President Obama says the safeguards in the new law against unfair lending will benefit not just consumers but the economy as a whole. For their part, consumer advocates say the measure will curb some abusive practices, but they warn it is not airtight.

NPR's Scott Horsley reports.

SCOTT HORSLEY: Long before Lehman Brothers fell and financial shocks rattled Wall Street, Mike Calhoun was sounding the alarm about unfair lending practices threatening ordinary consumers.

Calhoun is president of the Center for Responsible Lending, which has long complained about predatory mortgages and payday loans. He notes some of the biggest subprime lenders eventually went out of business as a result of their own excesses.

Mr. MICHAEL CALHOUN (President, Center for Responsible Lending): I can remember meeting in 2006 in the summer with top management of New Century. We said all of our data shows that these mortgages are not sustainable. And somewhat to our surprise, they agreed.

HORSLEY: Calhoun says with today's bill signing, the nation has a way to stop such reckless lending.

The law is designed to protect consumers not only from overaggressive banks but also mortgage brokers, check cashers and payday lenders, who were lightly regulated until now.

White House economic adviser Austan Goolsbee says one goal is to bring these so-called shadow bankers out into the sunlight.

Mr. AUSTAN GOOLSBEE (Member, Council of Economic Advisers; Chief Economist, Economic Recovery Advisory Board): More than two-thirds of the subprime lending, for example, in mortgages was done by non-banks. There's going to be consistent regulation applied across everybody. So it doesn't matter who you are. It matters what you're doing.

HORSLEY: The law sets up a new bureau within the Federal Reserve to police all kinds of lenders. Unlike bank regulators with multiple responsibilities, this bureau will have just one job: protecting consumers.

Mr. GOOLSBEE: And everybody will know if something's going wrong, here's where you go. You go to the consumer protection agency. They're going to have their rear in the seat, you know, in the hot seat to be held accountable.

HORSLEY: Groups like the Chamber of Commerce warn the law creates uncertainty for businesses, discouraging them from hiring workers.

But President Obama insists reputable companies have nothing to fear from the new rules. More than two years ago, candidate Obama argued that failure to protect consumers ultimately hurts business as pain trickles up. And Goolsbee says the president still believes that.

Mr. GOOLSBEE: It's not anti-market to be for stronger oversight. 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.

HORSLEY: The new law represents the biggest change to financial rules in decades. But it largely exempts one group of lenders: Car dealers fought to be saved from the new bureau, and they won.

Ms. ROSEMARY SHAHAN (President, Consumers for Auto Reliability and Safety): It's a huge loophole because auto lending is second only to home mortgages and bigger than credit cards.

HORSLEY: Rosemary Shahan heads a California-based consumer group that specializes in cars and car loans. She says some of the risky lending practices that plagued the subprime mortgage industry can also be found on the nation's car lots.

Ms. SHAHAN: 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 the risks throughout the financial system.

HORSLEY: 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.

Scott Horsley, NPR News, Washington.

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