The consumer protection agency that was created in the wake of the financial crisis launched Thursday, lacking key powers that Congress had intended to give it.
The Consumer Financial Protection Bureau begins this week to enforce dozens of rules that Congress lumped together as part of last year’s overhaul of financial regulations. It will help ensure that credit card holders have a clear understanding of the plastic in their wallets, borrowers are protected from unfair lending, and military families have a dedicated financial watchdog.
Yet without a confirmed director, the agency can’t write or enforce new rules for nonbank financial companies, which made about half of the riskiest subprime loans before the crisis. The agency was created as the first-ever federal regulator for many of these companies. Lawmakers wanted to prevent them from sidestepping rules that already applied to banks.
For payday lenders, prepaid card companies and other nonbanks, the new rules may be a little like the 1930s and the advent of the Securities and Exchange Commission, says Eugene Ludwig, who was Comptroller of the Currency, the top regulator for national banks, during the Clinton administration.
The lack of a confirmed director means those companies have less to worry about in the short term. President Barack Obama’s choice for the job is former Ohio Attorney General Richard Cordray.
Republicans say they will block him or any other nominee until the power of the agency and its director are scaled back. They have introduced legislation that would replace the agency’s director with a five-person commission and give Congress more control over its budget. The Democratic-controlled Senate is unlikely to take up the measures, and Obama said Wednesday that he would veto it.
Supporters of the agency say it will be more effective than its predecessors because it has a single focus: making sure consumers are treated fairly by banks, lenders, and other financial companies. They say Americans and the companies will be stronger financially as a result.
Before the financial overhaul, the responsibility for protecting consumers was shared among seven agencies that also were responsible for making sure banks stayed healthy. That sometimes presented conflicts, such as when banks increased their use of steep overdraft fees. Because the regulators were focused on banks’ financial performance, consumers often lost out.
Banks are nervous that the agency’s rules will make it difficult to profit from some products. That would discourage them from developing new offerings that consumers might want, they say.
Until Congress confirms Cordray or another director, Treasury Secretary Timothy Geithner will serve as the agency’s acting director. Elizabeth Warren, the Harvard Law School Professor tapped by Obama to help set up the agency, will return to teaching.
Here’s how the new agency will impact consumer financial products and services:
Mortgage costs: The true cost of a mortgage will become easier to understand. That’s because there will be less paperwork and legalese for applicants to wade through. The agency has released drafts of a simplified, two-page form that would replace the more complex forms that borrowers currently receive. A final version is expected by next July.
Credit cards: The agency has indicated that improving credit card disclosures is a top priority. Agency officials are working on a tool that would enable consumers to make apples-to-apples comparisons when shopping for cards. The credit card reforms that went into effect last February required changes to credit card statements, including clear disclosure of the cost of only making minimum payments.
Credit scores: The agency will be responsible for enforcing rules that provide more information to consumers who apply for loans. Credit card or loan applicants who are rejected will automatically receive a copy of the credit score used as a basis for that decision. The notice will include detailed information about how the score was calculated and major factors that hurt the score. Applicants who aren’t given the best interest rates will also receive the information.
Complaints: For the first time, there will be a single hotline for consumers to make complaints about any financial product or service. Through its consumer response center, the agency eventually will accept feedback about banks, credit card issuers, prepaid card companies, and other service providers. Officials will create a database from the tips to identify industry-wide patterns.
The new tip line will be rolled out in phases. At first, it will accept complaints about credit cards. Other products will be added in the coming months.
In the past, the only option for a bank’s customers was to call its main federal regulator. That rarely helped. The Office of the Comptroller of the Currency, which supervises national banks, received hundreds of thousands of complaints about consumer lending between 2000 and 2008. Yet it took public action only a dozen times, according to the Center for Responsible Lending, a nonprofit advocacy organization.
The new tip line will be rolled out in phases, with an initial focus on complaints about credit cards.
Mortgages: The agency will enforce a new ban on mortgage brokers receiving kickbacks in exchange for giving borrowers higher-cost loans. Because of those kickbacks, some home owners with strong credit ended up with costly, subprime loans that they couldn’t afford. Under the new rules, loan applicants will be more likely to receive the lowest rate that they qualify for.
However, applicants with weak credit might have a harder time getting a loan. Under a separate rule that the agency will enforce, lenders must make sure that borrowers can afford to repay a loan. Lenders will scrutinize loan applicants’ income, assets, and credit histories more carefully. Other rules in the financial overhaul might lead lenders to require higher downpayments that poorer borrowers can’t afford.
The agency also is expected to propose new rules governing companies that collect home owners’ mortgage payments and foreclose on people who don’t pay. Those companies foreclosed illegally on thousands of home owners as an unprecedented number of Americans defaulted on their loans.
Credit cards: The agency oversees the card industry, and enforces year-old limits on fees and billing practices. With such limits in place, companies can’t make money on borrowers who are less likely to repay their debts. Since the rules took effect, consumers with weak credit are receiving fewer card offers, despite an increase in the overall volume of mail from credit card companies.
Military families: Through its Office of Servicemember Affairs, the agency will seek to protect military families from predatory lending and other problems often seen in that community. It’s led by Holly Petraeus, a longtime advocate and wife of Gen. David Petraeus. Servicemembers enjoy special legal protections because of the difficulty paying bills when overseas. For instance, foreclosures on active-duty servicemembers are illegal, and interest rates on certain debts, including mortgages and credit cards, must be lowered to 6%.
Senior citizens: The agency will operate a separate office aimed at serving this community, which will continue to grow as baby boomers retire. They face a particular vulnerability to scam artists because many live on a fixed income.
Bank supervision: Agency officials will begin monitoring the treatment of consumers by the 111 biggest banks that have total assets of over $10 billion. This group represents more than 80% of the industry. Smaller banks and credit unions are not part of this program, which will include on-site examinations, although they must follow rules established by the agency.