Obama wants financial protection agency with teeth

By Karey Wutkowski and Rachelle Younglai
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. Continued...
Source: Reuters