How Obama's financial watchdog could protect you
The sweeping financial reforms President Obama announced today would bring about one important victory for consumers — a new financial product safety commission.
As described in a Treasury Department white paper, the Consumer Financial Protection Agency (CFPA) would have jurisdiction over credit cards, mortgages and other payment products, which were previously regulated by various banking agencies. The agency's mission would be to ensure that consumers have a clear understanding of the financial products they use, as well as to protect them from abusive or unfair practices.
As President Obama said in today's speech, "This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want — and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what's best for you."
Consumer advocates are hailing the proposed agency. "By setting up a single consumer financial protection agency, the administration is ensuring that the same rules will apply to similar products across all financial institutions," says Kathleen Day, spokesperson for the Center for Responsible Lending. "Companies will not be able to shop regulators for the most favorable treatment." States would be free, however, to make laws even stricter than federal rules.
The CFPA has already received support from two influential Congressmen — Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.), who both chair key financial committees. Still, the proposed reforms face stiff resistance from Republicans in Congress, as well as from financial services lobbying groups. The American Bankers Association, for one, has announced its oppposition.
Still, if Obama's proposals are enacted, they could make a big difference to your pocketbook. Here's a quick look at how you might benefit:
Mortgages: To make consumer choices easier, all lenders would be required to offer a "plain-vanilla" mortgages with simple terms and pricing along with other financial products. Consumers would also be entitled to receive clear disclosure about their mortgage, including the risks and benefits. Prepayment penalties would be restricted or banned.
Mortgage brokers would have to ensure that the products they sell are affordable to borrowers, as well as avoid conflicts of interest. The new rules would ban "yield spread premiums" — a form of compensation from lenders that have encouraged brokers to push higher-priced loans that are less affordable for consumers. Brokers would also be paid over time based on the loan performance, rather than a lump sum at closing.
Credit. The agency would regulate forms of consumer credit that previously fell through the cracks, such as overdraft protection plans, according to the White House proposal. For example, the CFPA might prohibit charging for overdraft coverage unless the consumer has opted in to the plan.
Help for low-income families. A key mission for the new agency would be to enforce the Community Reinvestment Act and fair lending laws. This would ensure that low-income communities have access to financial services, lending and investment.
Tell us, what do think of the notion of a Consumer Financial Protection Agency?