WASHINGTON (Reuters) - The outspoken head of a U.S. Congressional watchdog panel will strongly urge lawmakers on Wednesday to set up a new government agency to protect consumers from “tricks and traps” set by banks.
President Barack Obama has called for creating an independent financial products agency to oversee consumer lending as part of his sweeping proposal to overhaul the U.S. financial regulatory system.
“We can help fix the broken credit market. And I can sum it up in four words: Consumer Financial Protection Agency,” said Elizabeth Warren, chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program, in prepared remarks.
Warren, who is a professor at Harvard Law School, will be the marquee witness at a House of Representatives committee hearing on Wednesday looking at a key provision of Obama’s broad plan to drag the aging U.S. financial regulatory system into the 21st century.
The provision to establish a financial protection agency for consumers “will be carried out,” Senator Jack Reed, chairman of the Senate securities subcommittee, said in an interview with Reuters Television on Tuesday.
“Definitely you have to have a consumer protection agency,” he said, echoing vows made in recent days by Obama and by Senate Banking Committee Chairman Christopher Dodd on a proposal that is meeting more criticism from business interests than perhaps any other part of the Obama plan.
Congress is only beginning to delve deeply into the plan, a far-reaching response to the severe banking and capital markets crisis that has rocked economies around the world. The European Union is eyeing similar reforms.
One issue in the crisis was the enormous debt shouldered by Americans in a real estate bubble fueled by subprime mortgages that many borrowers could not afford and did not understand, a factor that contributed to a huge spike in foreclosures that has helped drag the United States into recession.
Ending such lending practices is a key goal of the reforms being proposed by Obama and backed by congressional Democrats.
Warren, in her remarks to be given before the House committee led by Democratic Representative Barney Frank, cited studies and said that most consumers don’t understand the terms underlying credit cards, mortgages, payday loans, tax refund anticipation loans and credit scores.
“The broken credit market has put American taxpayers on the hook for billions in subsidies and trillions in guarantees to shore up our largest financial institutions. ... If we do not fix this, we will be hurt again and again,” she said.
A financial protection agency would help consumers make better decisions for themselves, she said.
Warren said that banking has changed over the years, from an old model that she called “simple and effective: consumers shopped around for products and terms, and lenders evaluated the creditworthiness of potential borrowers before making loans.
“Today, the business model has shifted. Giant lenders ‘compete’ for business by talking about nominal interest rates, free gifts and warm feelings, but the fine print hides the things that really rake in the cash. Today’s business model is about making money through tricks and traps,” she said.
The proposed new watchdog, however, is already drawing sharp criticism.
The Obama plan “would create a very powerful agency that could make it much more expensive for banks to offer products and services to consumers,” said financial services policy analyst Jaret Seiberg at research firm Concept Capital.
“The chairman of the (agency) would be vested with tremendous power and few checks or balances. This should be especially worrisome to the banking sector as we would expect Professor Elizabeth Warren ... to get the job.”
Representative Bill Delahunt has introduced legislation in the House to create a “Financial Product Safety Commission.” He said in prepared remarks that it was originally Warren’s idea.
It would “review financial products for safety; modify dangerous products before they hit the markets; establish guidelines for consumer disclosure; and collect and report data about the uses of different consumer loans,” Delahunt said.
Some current regulators have said they fear separating bank safety and soundness oversight from consumer protection.
Ellen Seidman, a former bank regulator who is now a senior fellow at the New America Foundation, a think tank, expressed support for the new agency in her prepared remarks for the committee. But she said bank regulators should retain consumer protection responsibilities.
“The bank regulators, given the proper guidance from Congress and the will to act, are quite capable of effectively enforcing consumer protection laws,” Seidman said.
A leading bank industry group said in its prepared remarks that new rules and examinations from the proposed safety agency would be costly, especially for smaller banks, and would not likely result in better protections for consumers.
Edward Yingling, president of the American Bankers Association, said the agency would contradict the goal of fashioning an integrated, comprehensive regulatory system.
“Simply put, it is a mistake to separate the regulation of an institution from the regulation of its products,” he said.
Editing by Leslie Adler