When Elizabeth Warren was a Harvard law professor in 2007, she decided to give her students a really tough test: Could her elite third-year bankruptcy class — the best of the best — decipher the small print in a typical credit card promotion. They almost failed. It took 80 soon-to-be-lawyers the better part of an hour to figure out that the 3 percent cash back come-on would only kick in if the credit card holder was paying 17.99 percent interest. And even then, no one was sure they got it right.
It’s no wonder that President Obama is considering Warren to head a new powerful agency within the Federal Reserve designed to protect borrowers from lender abuse. As Congress began reconciling the Senate and House versions of the Restoring American Financial Stability Act yesterday, Senate Banking Chairman Chris Dodd declared, “The central question that we must address in this bill is, how do we restore the faith of the American consumer?"
Under both bills, which Obama hopes to have reconciled before the July 4 recess, Congress plans to create a single agency to write and enforce consumer protection rules covering financial services products other than insurance and securities. It would regulate banks and credit unions with assets greater than $10 billion, plus mortgage brokers, payday lenders, debt collectors and consumer reporting agencies. (Auto dealers, exempted by the House bill, are lobbying to stay out of the new system of oversight.)
Simpler Contracts = Smarter Shoppers
The key job of the new consumer protection agency will be to reform the financial services marketplace by requiring simple contracts that allow customers to easily compare products. Better-informed consumers, proponents say, should be less vulnerable to a “teaser rate” culture in which companies compete with low upfront rates and hide fees in the fine print. Warren is now chair of the Congressional Oversight Panel, created in 2008 to review the state of financial markets and the regulatory system.
The new agency will assume duties now divided between the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, National Credit Union Administration, and Federal Trade Commission — a regulatory patchwork critics say was proved inadequate by the mortgage crisis. "They dropped the ball," says Travis Plunkett of the Consumer Federation of America. “We had seven agencies protecting financial consumers, and it wasn’t a priority for any of them.”
The Office of Thrift Supervision, which was responsible for regulating lenders like Countrywide and Washington Mutual, would disappear, putting an end to “charter shopping,” which allows a bank to choose its regulator, playing one against the other, said Ruth Susswein, at Consumer Action.
New Cops on the Beat: State Attorneys General
The new agency could also overrule future contract clauses mandating that complaints go to arbitration panels. The Securities and Exchange Commission could make a similar change to investor contracts, helping investors complaining about brokerage services. Consumers have far more clout, advocates say, when they can bring disputes to courts.
Not everyone agrees. “When arbitration is done in a way that’s fair to consumers, it is a quicker and less expensive way to resolve disputes,“ said financial services attorney Andrew Sandler, co-chair of BuckleySandler in Washington, D.C. “Arbitration is a good thing, like mortgage loans are a good thing. The answer isn’t to stop making mortgages, but to stop making bad mortgages.”
The House, but not the Senate, passed a provision placing more legal responsibility on stock brokers when giving advice. Congress also would boost consumer protection by allowing state attorneys general to enforce federal consumer protection laws and extending those laws to subsidiaries and affiliates of national companies.
Attack on “No Doc” and “No Income, No Asset” Loans
The overhaul takes direct aim at some of the mortgage-lending practices that led to shaky loans and foreclosures. Lenders are required to take steps — outlined in the law — to ensure that the “consumer has a reasonable ability to repay the loan” — and not just at a teaser rate. “No-doc” loans and so-called “NINA” loans (“no income, no asset”) loans are eliminated. Under the House plan, fixed-rate mortgages would have no prepayment penalties after three years. In addition, the proposals state that mortgage brokers can’t be paid to steer borrowers into higher rates.
Coming Soon: Discounts for Cash
Retailers could offer discounts to customers who pay cash or use debit cards, under a Senate provision. The fees retailers pay large banks when customers use credit cards would also fall, if a provision in the Senate bill enabling the Federal Reserve to set those fees is enacted. Merchants have complained that fees in the United States have kept rising, despite new technology that has brought them down abroad.
Under the Senate provision, banks with less than $10 billion in assets could continue to get higher fees. But small bankers argue that the new rule would push Visa and Mastercard to lower the fees the small banks collect, reducing an important source of revenue. Community banks have fought the Senate provision, so far unsuccessfully. “At the end of the day, you’ll see fewer small community banks,” said Richard Hunt, President of the Consumer Bankers Association.
Whatever else happens, expect some kind of new consumer watchdog. “We’ll have to wait and see what the new agency does,” Susswein said.”But there’s minimal federal coverage now of auto dealers, payday lenders and debt collectors. I’m hoping that the new agency really has independence and authority.”
Ed Mierzwinski at PIRG says it will. “The big banks, small banks and the U.S. Chamber of Commerce led a multimillion dollar campaign to kill or weaken the consumer protection agency and they lost on both floors,” he said. “The final law will include a strong, independent agency because it’s in both bills.”