The Obama administration Tuesday sent legislation to Congress to create a Consumer Financial Protection Agency that would oversee consumer bank and credit products, taking away such power from the banking regulators who have been criticized for failing to prevent abuses in the mortgage and credit card markets.
The 152-page draft bill largely hews to the outline that Treasury Secretary Tim Geithner unveiled this month to overhaul the nation's financial regulatory system, creating an agency modeled on the Consumer Product Safety Commission for many financial products.
"This agency should have strong powers not to just set rules, but also to supervise institutions and to examine institutions and enforce with respect to institutions," said Michael Barr, Treasury assistant secretary for financial institutions.
The agency would have the power to impose fines and refer for criminal prosecution those who engage in unfair, deceptive or abusive acts. It would be able to act when it reasonably concludes the product in question would likely cause "substantial injury" to consumers. But the draft bill would exclude securities products such as mutual funds and keep such enforcement under the SEC, while futures would fall under the jurisdiction of the Commodity Futures Trading Commission.
The draft did not include any language on regulating the property and casualty insurance market, where states have jurisdiction. The federal standards would be a floor where states could enact even tougher measures and state attorneys general could enforce. But the new agency would not be allowed to impose usury limits under the draft bill.
As for mortgage regulation, the agency would have to propose within one year a mortgage disclosure form that would combine requirements under the Truth In Lending and Real Estate Settlement Procedures acts, which banking regulators and HUD have struggled for years to do.
In addition, the agency could ban mandatory arbitration in financial contracts, a win for the trial lawyer lobby, which has been pushing Congress to roll back such contracts that have become more ubiquitous for consumer purchases.
The draft bill would establish a framework under which employees from the Federal Reserve and other banking regulators would be transferred into the agency to ramp up its efforts. But it does not detail how the agency would be funded.
The House Financial Services Committee is slated to mark up its Consumer Financial Protection Agency legislation before the August recess, while the Senate Banking Committee plans to incorporate its bill into a larger overhaul measure this fall.
"While the committee will, of course, exercise its own judgment on the specifics ... it is helpful to have the administration's proposals as well because I believe there is a great deal of common ground between us," said House Financial Services Chairman Barney Frank, D-Mass.
House Republicans are against the proposal, arguing that such enforcement should remain with frontline regulators who know the issue better. "A consumer financial protection agency would be the creation of yet another regulator, with human error encouraged by separating regulatory decisions from the already limited expertise found at prudential regulatory agencies," said House Financial Services Capital Markets Subcommittee ranking member Scott Garrett, R-N.J.