WASHINGTON (Reuters) - The Obama administration intends to propose the creation of an independent Consumer Financial Protection Agency that will be able to write and enforce rules for a wide group of financial firms.
The administration plans to propose that the new agency enforce fair lending laws, and have the authority to require loan originators to retain 5 percent of credit risk.
According to a document obtained by Reuters and later confirmed by an administration official on Tuesday, the agency will “protect consumers of credit, savings, payment and other consumer financial products and services, and to regulate all providers of such products and services.”
President Barack Obama has identified consumer protection from shoddy financial products as one of his top priorities. But it had been unclear if that would mean beefing up existing agencies or creating a new one that would write regulations and gain supervisory and enforcement powers.
The administration intends to lay out on Wednesday its plan to overhaul financial regulation, which will include a regulator to monitor risk across the financial system, proposals on capital standards, and additional transparency in derivatives markets.
The idea of a consumer financial protection agency has attracted opposition from some business groups who fear that it will stifle product innovation and undermine financial firms’ primary regulators.
Consumer advocates and lawmakers from both political parties have strongly endorsed the creation of a new agency to protect consumers after a credit crisis largely fueled by loosely regulated mortgage products and servicers.
Senator Charles Schumer, a New York Democrat, told reporters on Tuesday that a consumer financial protection agency “makes eminent sense.” He added, “The Fed, which was basically doing these types of regulations, did not do a very good job.”
As laid out by the administration document, the new agency will define standards for “plain vanilla” products such as mortgages with straightforward terms.
The agency could restrict or ban prepayment penalties on loans and could also ensure that banks, nonbanks, and independent mortgage brokers all play by the same rules.
It would also be responsible for enforcing the Community Reinvestment Act, which encourages banks to make loans in disadvantaged communities.
Further, the agency would have wide power to ban unfair terms for financial products, if the agency determines the benefits of limiting the products outweigh the costs.
The agency’s rules will serve as base standards, and states will be allowed to create their own consumer protections to bolster the federal regulations, according to the proposal.
The proposal would likely strip some responsibilities from the Federal Reserve and possibly the Securities and Exchange Commission and the Federal Trade Commission.
Easing the Fed’s load could pave the way for it getting new powers, such as being the primary systemic risk regulator.
Connecticut Democrat Christopher Dodd, the chairman of the Senate Banking Committee, has said the Fed needs to be stripped of some responsibilities if it takes a leading role in policing systemic risk.
It is unclear whether the SEC, which supervises mutual funds, broker-dealers and investment advisers, among other things, will lose any authority. SEC Chairman Mary Schapiro, who has condemned ideas to remove consumer protection functions from her agency, has been working behind the scenes to ensure that the SEC is not swallowed by the administration’s regulatory overhaul.
A coalition of interest groups, including consumer groups and the AFL-CIO labor federation, is strongly backing the creation of such an agency.
“Our financial regulatory system is broken,” said Ed Mierzwinski, consumer program director at U.S. PIRG, a federation of state public interest research groups. “Banks are allowed to pick and choose their regulators and they simply picked the ones that don’t protect consumers.”
Reporting by Karey Wutkowski and Rachelle Younglai with additional reporting by Susan Cornwell and Ross Colvin; Editing by Tim Dobbyn