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House to Begin Work on Consumer Financial Protections

October 12, 2009 - by Donny Shaw

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street… Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance … The difference between the two markets is regulation.

That’s how Congress’ bailout watchdog, Elizabeth Warren (pictured at right w/ Barney Frank), began a 2007 article making the case for a new regulator for the consumer financial market. This week, more than two years after Warren originally floated the idea, Congress will take it’s first step towards turning her vision into a reality.

On Wednesday, the House Financial Services Committee will begin its mark-up of the Consumer Financial Protection Agency Act of 2009. It’s expected to pass and be sent to the full House for a vote in the near future. The bill would establish the new consumer protections agency that, since being proposed by Warren, has been endorsed by Treasury Secretary Timothy Geithner, President Obama, Congressional Democrats and a host of consumer, housing and labor groups.

As important as the agency would be, most people don’t really know what it is. Below is my attempt at a quick explainer, laying out the agency’s responsibilities and authorities with links to specific provisions in the bill text so you can drill down for more detail.

Basically, the Consumer Financial Protection Agency would take powers away from a range of other regulators and combine them to be the sole federal regulator for the types of financial products that ordinary people deal with on a day-to-day basis, like mortgages and credit cards. Their focus would be unique – instead of working to protect safety and soundness in the financial markets, they would work to ensure that the financial markets are safe for consumers.

The bill’s going to change as it goes through the legislative process. In fact, it’s already changed a bit (it’s been weakened in a few major ways) since it was introduced in July. Most of the bill language is vague. It doesn’t spell out exact rules for consumer financial products, but gives the agency jurisdiction over certain areas and directs them to make their own rules. Based on the current state of the legislation, here’s what you need to know about the Consumer Financial Protection Agency being considered by Congress:

  • It’s mission would be to "to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services. More specifically, it would be in charge of ensuring that (1) consumers have access to the information they need to make responsible decisions about consumer financial products; (2) consumers are protected from abuse, unfairness, deception, and discrimination; (3) consumer financial markets are operated “fairly and efficiently with ample room for sustainable growth and innovation;” and (4) “traditionally underserved consumers and communities have access to financial services.”

  • Their area of oversight would apply to all consumer financial products or services. The bill text defines these as “any financial product or service to be used by a consumer primarily for personal, family, or household purposes.” It’s generally understood to include mortgages, credit cards, debit cards, car loans, payday loans, gift cards, credit score reporting companies, debt collectors and financial advisers.

  • The agency would have the power to determine what consumer financial products or services are unfair, deceptive, abusive, or discriminatory and make rules to ban them, restrict them, or place them under special conditions. In using these powers, the bill directs the agency to consider “the potential benefits and costs to consumers and covered persons, including the potential reduction of consumers’ access to consumer financial products or services.”

  • The agency would have the power to subpoena people and information in order to discover violations of their rules in the financial consumer products markets. They would also be able to prosecute violators and levy fines.

  • Fines collected by the agency from companies that violate their rules would be put into a “Consumer Financial Protection Agency Civil Penalty Fund” and paid out to people who have been victims to unfair and deceptive practices in the consumer financial market.

  • The bill gives the agency specific authority to restrict mandatory pre-dispute arbitration clauses in consumer financial products. These are clauses buried in the fine print of contracts that require consumers’ disputes to be heard in private by arbitrators rather than in the courts. The agency would be have the power to prohibit or impose limitations on these clauses if they determine that doing so would be in the public interest and good for the protection of consumers.

  • The agency’s rules and regulations would be treated as a floor, not a ceiling for further state regulations. In other words, if they set rules that are stronger than individual states’ laws, the agency rules would take precedence. But if the agency’s rules are weaker than the laws in an individual state, the stronger state law still applies in the state. The agency would be in charge of deciding whether a state law provides greater protection than the federal rules and should be left in tact in that state. This provision is being targeted for removal by the business-friendly New Democrats coalition. They are proposing an amendment that would restrict states from enforcing tougher laws than what the agency promulgates.

  • The agency would be lead by five board members, each serving staggered five-year terms. Four of the members would be appointed by the President and confirmed by the Senate; the fifth would be “the head of the agency responsible for chartering and regulating national banks.”

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