Consumer Agency to Slim Regulatory Burden: Warren

The main goal of a new U.S. consumer protection agency would be to encourage the development of more customer-friendly financial products, not limit the activities of banks and other institutions, a top watchdog for the U.S. financial bailout said Tuesday.

woodleywonderworks Treasury Seal

Elizabeth Warren, who chairs the Congressional Oversight Panel for the bailout program, said the proposed agency would not be a heavy regulator that drives up compliance costs.

"The driver behind this will be the plain vanilla products," Warren told Reuters in an interview. "I don't worry about this going too far because it's based on a different premise.

It's not an agency that will say, 'You can't do that, and you can't do that."' The U.S. Treasury Department Tuesday revealed a legislative proposal that fleshed out an earlier administration plan to create a Consumer Financial Protection Agency.

The plan would strip current bank regulators of their consumer protection responsibilities and house them in the new agency, which would have sweeping powers to write and enforce tough consumer protection rules for banks, mortgage lenders and other financial institutions.

It also would encourage the development of "plain vanilla" products such as mortgages and credit cards with simple terms and contracts.

And while the plan calls for the creation of a new federal agency, Warren said it accomplishes the administration's goal of streamlining regulation by creating a uniform set of rules and best practices for all financial institutions.

"People have been talking about consolidation and this is what the agency does," she said. "The total regulatory burden gets slimmed down."

Warren, a professor at Harvard Law School and frequent backer of the consumer finance agency idea, has been the subject of speculation as it first head, but has said she is happy with her current career.

Business and banking groups have argued that such an agency would add an unnecessary layer of regulation and will result in less options for consumers and higher credit costs.

Bank regulators have also been voicing concerns behind the scenes, arguing it makes little sense to separate the regulation of an institution's safety and soundness from the regulation of its products and services.

But critics may find it hard to scuttle the plan completely, with bipartisan support in Congress for some type of central oversight of financial products for consumers.

The House Financial Services Committee hopes to approve by August a bill creating the new agency.

The administration plan aims to protect Americans from abusive practices blamed for helping to spark the recent financial crisis, such as deceptive and undocumented mortgage lending, poor disclosures of loan terms, unfair interest rate increases and "fee traps" on credit cards.

"If the current federal agencies had used the power that was given to them, then we wouldn't be in this financial crisis," Warren said.

She said the new agency's activities may cut into financial institutions' ability to produce huge revenues on hidden fees, but she said the end result will be less expensive products that are good for consumers and banks.

"With straightforward products and simple disclosures, the markets for these products will change dramatically," Warren said. "It will change things around."

Highlights of the legislation include:

The CFPA would be an independent agency within the executive branch with a five member board charged with regulating the provision of financial products and services to consumers.

It would be mandated to promote transparency, simplicity, fairness, accountability and access in the market for financial products and services.

Four board members would be appointed by the president subject to Senate confirmation; the fifth would be the director of the newly proposed National Bank Supervisor.

-- The agency would administer and enforce a number of consumer protection laws, including the credit card bill enacted earlier this year.

It would be able to prescribe rules and would have supervisory and examination authority for consumer compliance, including at banks whose current regulators now have that authority.

It would also strip some power from the Federal Trade Commission. It would be able to enforce compliance with orders and penalties.

Within one year of taking over consumer financial regulation duties, it would be charged with proposing model loan disclosures that would integrate disclosures now required by the Truth in Lending Act and Real Estate Settlement Procedures Act.

-- Any rule the agency adopts will not pre-empt state law if state law affords consumes more protection.

-- It would be required to monitor the market continuously and publish significant finds at least once a year.

-- It would be required to weigh the costs and benefits of regulation in terms of access to credit and burden on financial institutions.

-- It would have authority to create standards and for enforcement for both banks and non-banks.

It would be able to gather information from any loan or financial service provider, including mortgage brokers. It would be able to issue subpoenas for documents and testimony.

-- It would have authority to collect annual fees or assessments to recover its costs.

The legislation would create a victims' relief fund for civil penalties obtained by the agency.

-- The Treasury Department said the agency could create guidelines for standard mortgages.

It could also require mortgage brokers to owe a "duty of best execution" among available loans to avoid conflicts of interest between themselves and homeowners, and a duty to help ensure only appropriate loans are offer.

The Treasury said it could also ban practices such as "yield spread premiums" -- side payments from lenders that encourage mortgage brokers to push consumers into higher priced loans.

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