A Consumer Financial Protection Agency (CFPA) has been proposed in HR 4173, the "Wall Street Reform and Consumer Protection Act of 2009," which was passed by the U.S. House of Representatives in December 2009. This bill is currently before the U.S. Senate, and the final version has not yet been put forth or signed into law. If created, the CFPA would regulate much of the consumer financial products and services, replacing the current (rather convoluted) system of multiple agencies regulating the same things, just in different ways. The idea is that a single agency could be a lot more efficient and effective.
As previously posted on HSH.com, many analysts and lawmakers feel that, under the current system of regulation, agencies such as the Federal Reserve are more concerned with protecting the integrity of financial markets than they are with the interests of individual consumers. Like the financial institutions themselves -- whose duty to their shareholders often comes before their duty to their customers -- some agencies cannot escape a certain level of conflict of interest. A separate agency that only looks after consumers relieves others of that responsibility.
According to a summary by the Independent Community Bankers of America, the CFPA would be given jurisdiction over the following statutes:
- Community Reinvestment Act
- Consumer Leasing Act
- Electronic Funds Transfer Act
- Equal Credit Opportunity Act
- Fair Credit Billing Act
- Fair Credit Reporting Act (except red flag guidelines, affiliate sharing, and disposal of records)
- Fair Debt Collection Practices Act
- FDIC Act (relating to consumer provisions)
- Gramm-Leach Bliley Act (relating to disclosure of personal information)
- Home Mortgage Disclosure Act
- Home Ownership and Equity Protection Act
- Real Estate Settlement Procedures Act
- SAFE Mortgage Licensing Act
- Truth in Lending Act
- Truth in Savings Act
- Alternative Mortgage Transaction Parity Act
Why the CFPA May Improve Regulation of Financial Institution
As Harvard Law professor Elizabeth Warren -- whose input has been highly regarded in the design of the CFPA -- has observed that today's system of multiple regulators has allowed many financial firms to seek out the least restrictive watchdog. Others have managed to dodge oversight altogether. A single agency is designed to put a stop to that.
Evidence of banking regulators' negligence can be found in an audit report from the Office of the Inspector General (OIG) for the Department of the Treasury. The report concluded that officials at the Office of Thrift Supervision, which provided oversight for the failed IndyMac Bank and other thrifts across the U.S.,not only were aware of misleading financial reporting at some of these institutions, but in some cases actually directed them to engage in deceptive accounting practices that made them appear healthier than they were. The OIG used phrases such as "alarming," "very serious," and "inappropriate" to characterize the accounting practices of these institutions which were "not in accordance with generally accepted accounting principles (GAAP) and allows for misleading financial reporting by the thrifts."
CFPA Charged with Heading Off Future Crises
If there had been a CFPA on duty several years ago, could it have averted the housing bubble? No one knows for sure. However, the 1,200-plus-page HR 4173 may result in the creation of a watchdog for homebuyers and mortgage borrowers with the hope that future mortgage transactions will be safer for consumers.
The bill is huge -- encompassing everything from the home loan application to the sale of that loan on Wall Street. If passed, consumers will be less able to get a mortgage with no down payment, no income or asset documentation, exaggerated appraisals, and payment plans that increase your loan balance. Nor will Wall Street investment banks be allowed to call a subprime loan a grade-A investment, and pawn them off on unsuspecting investors.
Mortgages in the Future Will Be Scrutinized
If passed, the CFPA will be given broad powers to regulate the consumer-safety features of mortgages. While no specific types of loans are outlawed in the legislation, the CFPA will surely limit or closely watch mortgages that come with a layering of risk -- artificially low teaser rates, limited documentation, optional payments, or negative amortization.
The agency would also ferret out discrimination in mortgage pricing, underwriting, and selling -- such as pushing minorities and seniors into higher-cost loans, or unfairly denying credit on racial or other illegal grounds. The CFPA would pretty much take over enforcement of fair lending and the Equal Credit Opportunity Act.
Policing Mortgage Lenders and Real Estate Agents
The CFPA would be charged with stomping out dodgy practices like under-the-table payoffs in exchange for business referrals. It would also be responsible for making disclosures of loan terms to consumers fair, honest, and understandable. The current controversial Home Valuation Code of Conduct (HVCC), which many feel has been costly to consumers and detrimental to the housing industry, would be abolished in favor of giving the CFPA general oversight on home real estate appraisals, and on adopting standards to guarantee "appraiser independence" from lenders, real estate agents, and sellers.
The new agency would have the power to pursue, prosecute, and punish those who abuse consumers' trust. This new watchdog will have teeth. Have any thoughts on what the CFPA should be doing? Share them by taking a survey in this recent Market Trends Newsletter.