Obama Urging Consumer Unit to Tame Lenders; Industry Fears Just Tinkering

Article excerpt

Byline: Patrice Hill and Sean Lengell, THE WASHINGTON TIMES

The Obama administration will propose a new agency to protect consumers from the kinds of lending abuses that led to the collapse of financial markets worldwide, while consolidating the supervision of big banks under one agency in a regulatory overhaul plan to be announced Wednesday.

President Obama will propose consolidating the consumer protection functions of the Federal Reserve Board and other federal agencies into the Consumer Financial Protection Agency (CFPA), which will regulate consumer lending throughout the United States, guided by the principles of transparency, simplicity, fairness, accountability and access, senior administration officials said Tuesday on the condition of anonymity.

We can't have a system where bad mortgages are made and become a dead weight on the financial system for years afterward, said one official.

The new independent agency would be part of a sweeping overhaul of financial regulation that includes granting the Federal Reserve new powers to regulate companies deemed too big or interconnected to fail, such as American International Group Inc., a giant insurer that the Fed said it was forced to rescue from bankruptcy last year in a $182.5 billion taxpayer bailout.

A new council of regulators headed by the Treasury Department would assist and advise the Fed in spotting potential financial problems as they emerge throughout the economy

The plan would eliminate the Office of Thrift Supervision, whose lax regulation of Countrywide, Washington Mutual and other failed mortgage lenders is blamed in part for creating the financial crisis.

The thrift regulator would be combined with the Office of the Comptroller of the Currency into one regulator that would oversee all large and interconnected banks, eliminating opportunities for regulatory arbitrage that the free-wheeling mortgage lenders exploited in the past, the official said.

All of the proposals for new agencies would have to be approved by Congress, where leaders of the banking committees are already drafting their own versions of regulatory reform. Certain provisions of the plan, such as the requirement that large banks set aside more capital to cover increased risks from their sophisticated global trading operations, can be imposed administratively without action by Congress.

The consumer protection agency would be responsible for detecting and rooting out risky and deceptive loan instruments like the subprime and exotic mortgages that many homebuyers assumed during the housing boom without understanding that their payments would increase after a period of months or years to levels they could not afford.

Many of those loans are in default today and, combined with the steep drop of housing prices, are threatening the health and solvency of the banks that hold them, in what became the main cause of the banking and financial crisis that continues to this day. …