Consumer agency to slim regulatory burden: U.S. watchdog

By Karey Wutkowski

WASHINGTON (Reuters) - 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 on Tuesday.

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 Treasury Department on 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.