Obama and Regulation, an Insider's Perspective: Foreclosure Fund, Bankruptcy Reform among His Proposals

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Bankers should have no illusion about the direction Sen. Barack Obama would take financial services policy if he were elected president.

The presumptive Democratic nominee backs a detailed list of programs aimed at protecting consumers and clamping down on lending practices, from an interest rate cap on high-cost loans to a foreclosure prevention fund paid for by lenders.

"There is no question but that a President Obama will be substantially more with consumers than President Bush has been, because in effect this administration did nothing to protect financial consumers during its time in office," said Daniel Tarullo, an economic adviser to Sen. Obama.

A veteran of the Clinton White House and the State Department who now teaches at the Georgetown University Law Center, Prof. Tarullo said industry executives may be more receptive to Sen. Obama's consumer-minded approach in light of the turmoil in the credit markets.

"If you're sitting as a banker right now, you cannot be entirely happy with the end to which this unregulated environment has led," Prof. Tarullo said in an interview May 23. "Banks and all financial institutions are suffering as a result. The harm has trickled up in this case. Sound consumer regulation can make for very good business and make for good, prudential practices."

He characterized the senator as a quick study on financial services, citing his early support of efforts by Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank to empower the Federal Housing Administration to help struggling homeowners.

Sen. Obama's $10 billion foreclosure prevention fund, designed to help troubled borrowers sell their home or restructure an unaffordable loan, would be funded by penalties on lenders who commit fraud. He envisions new disclosures that would help borrowers compare mortgage products, and he would confront mortgage fraud by beefing up reporting, increasing funding for enforcement, and raising fines.

The Illinois Democrat would let bankruptcy judges modify mortgage terms, and he would encourage banks and credit unions to make short-term, small-dollar loans to provide underserved consumers with alternatives to payday lenders. His proposed 36% rate cap is directed at the payday industry.

Prof. Tarullo said financial institutions should not fear an Obama presidency, since the candidate would consider the trade-offs involved in any policy choice.

Bankers "may or may not agree with a position" taken by Sen. Obama, "but they can be assured that he will have an understanding of the costs and benefits of any particular approach," the adviser said.

To illustrate the point, he cited a March 27 speech at New York's Cooper Union in which Sen. Obama spoke at length about reforming the patchwork of financial regulation. The speech, delivered four days before the Treasury Department released its blueprint for reform, went further in some areas than the administration did.

For instance, Sen. Obama proposed giving the Federal Reserve Board clear supervisory authority over any institution that borrows from the central bank, extending its capital and liquidity rules to investment banks. …