CFPA Gets Big Boost From Obama

The White House actually made news today. Really, and it had nothing to do with Norway. The President came out with a full-throated endorsement of the Consumer Financial Protection Agency, actually foregrounding it among all the other elements of financial regulatory reform.

But a central part of our reform effort is also aimed at protecting Americans who buy financial products and services every day -- from mortgages to credit cards. It's true that the crisis we faced was caused in part by people who took on too much debt and took out loans they couldn't afford. But my concern are the millions of Americans who behaved responsibly and yet still found themselves in jeopardy because of the predatory practices of some in the financial industry. These are folks who signed contracts they didn't always understand offered by lenders who didn't always tell the truth. They were lured in by promises of low payments, and never made aware of the fine print and hidden fees [...]

As we've seen over the last year, abuses like these don't just jeopardize the financial well-being of individual Americans -- they can threaten the stability of the entire economy. And yet, the patchwork system of regulations we have now has failed to prevent these abuses. With seven different federal agencies each having a role, there's too little accountability, there are too many loopholes, and no single agency whose sole job it is to stand up for people like Patricia, Susan, Maxine, Andrew and Karen -- no one whose chief responsibility it is to stand up for the American consumer, and for responsible banks and financial institutions who are having to compete against folks who are not responsible.

So under the reforms we've proposed, that will change. The new Consumer Financial Protection Agency that I've asked Congress to create will have just one mission: to look out for the financial interests of ordinary Americans. It will be charged with setting clear rules of the road for consumers and banks, and it will be able to enforce those rules across the board.

This was an idea from Elizabeth Warren that had absolutely no traction in Washington, and now the President of the United States is backing it in major speeches. He even attacked the US Chamber of Commerce for opposing it. To me, that's a big deal. But Oslo went and ruined everything. Oslo!!

I was on a conference call with Austan Goolsbee after the speech, and he emphasized three key points:

1) transparency - the importance of writing rules for credit cards, loans, etc., in clear language with full disclosures
2) fairness - it's time to get rid of unfair or predatory practices like payday lenders, and level the playing field for community banks.
3) accountability - not only would financial institutions and regulators be held accountable (the thinking is that the only thing a CFPA regulator would do is protect consumers, instead of the current disparate nature), but consumers would be able to take responsibility without being taken advantage of.

There was a reporter from the Philly Inquirer on the call who had the gall to say that the people affected by deceptive practices in the financial industry "made some dumb decisions." This is going to be the standard claim from the right (remember Rick Santelli's "I don't want to subsidize the loser's mortgages" rant?) so it's important to be armed with the facts. The fact is that regardless of whether you "go out there and shop" (another claim by this lunatic), financial products are written currently in deliberately obtuse ways, and the profit margins of the lenders or banks are directly proportional to how much of the fine print they can hide. People intuitively know this, and all the associated games along with it. And they deserve a federal agency at least tasked with looking out for them.

Now unfortunately, some of this comes a little late, as the National Community Reinvestment Coalition mentioned today:

“We applaud the President’s necessary leadership on financial reform. Clearly the President felt it necessary today to speak out against the weakening of the bill. Unfortunately, the damage from corporate lobbying in Congress may have already been done,” said John Taylor, president and CEO of NCRC.  "The ability of the proposed Consumer Financial Protection Agency (CFPA) to protect the most financially vulnerable individuals and communities has already been undermined by substantial changes to the bill.”

“Most importantly, the proposed agency will not have sufficient independence from the existing regulators, whose failure to enforce the law was the reason for the establishment of the agency,” said Taylor. “The exclusion of enforcement of the Community Reinvestment Act was also a major concession to the financial services lobby, and allows them to continue to shirk affirmative obligations to serve and lend to working class Americans, within the constraints of safe and sound underwriting.”

In particular, Taylor is talking about the removal of "plain vanilla" financial products that would set a baseline standard for what's minimally required. And that's true. But it's good that Obama jumped in now before this weakens any further. And it would be good to re-emphasize this after the Nobel fervor blows over.

Veto Threat?

This is a gentle veto option, but if Obama actually carries through with it, I'd have to hand it to him.

The White House on Tuesday suggested that President Obama would consider vetoing regulatory reform legislation if it did not include strong enough protections for consumers of credit cards, mortgages and other financial instruments.

Press Secretary Robert Gibbs told reporters that there were "big" concerns inside the administration over reports that Congress was scaling back a key pillar of the president's approach to reform: the creation of a Consumer Financial Protection Agency (CFPA). And, in a warning shot to the legislative branch, he suggested that proposed legislation to create the CFPA might not pass the president's desk if it becomes too watered down in the process.

"The president would not sign any bill that he thought was too weak," said Gibbs. "I think we have seen what happens whether it is credit card companies, mortgage companies, we now see it more in stories covering the charges for bank overdrafts and the amount of money that costs the American people each year. The American people deserve an advocate on their behalf dealing with these entities. The president believes that strongly and believes that at the end of the day we will have a strong Consumer Finance Protection Agency working on behalf of the American people."

This is the proper use of the bully pulpit. The CFPA has already been gutted to an extent. Obama laying a marker can help assure it won't get gutted any further.

Obama veto threats have been rare to this point. The only other I can remember had to do with eliminating the F-22 fighter plane. This is a very good sign, if he's willing to go up against powerful interests, and his own party in the Congress, and siding with the people.

The banks are still running roughshod over Congress. They've beaten back any serious attempt to rein them in, and even now, after taking hundreds of billions if not trillions from the federal government, they are still taking major risks, still not engaging in consumer lending, still playing with derivatives at the same numbers from before the crisis. Clearly the Congress has shown no ability to stop them, and to this point, neither has the President. I hope this signals a true change.

Fed Up

Alan Greenspan had an interesting change of heart today. He endorsed the Consumer Financial Protection Agency as an overseer of banks and lenders.

For Alan Greenspan, lapdog to Ayn Rand, perhaps the only person in America not to recognize the possibility of human greed in the financial markets, to come out for a federal body overseeing the Masters of the Universe, the same kind of consumer protections he opposed while chairing the Fed, is quite a turnaround indeed. But then Greenspan told us that he was rethinking his theories after the biggest financial collapse since the Depression.

Greenspan: I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms…

Waxman: In other words, you found that your view of the world, your ideology, was not right, it was not working.

Greenspan: Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.

In particular, Greenspan said that the Fed's current responsibilities are quite enough for the body to manage without the added layer of consumer protection. He might have gone a bit further and mentioned that, when faced with a choice between monetary policy and consumer protection, the Fed will always choose the former. They don't exist for the mere consumer. You can see this in the performance of Alan Greenspan's Federal Reserve during the housing bubble.

The visits had a ritual quality. Three times a year, a coalition of Chicago community groups met with the Federal Reserve and other banking regulators to warn about the growing prevalence of abusive mortgage lending [...]

The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.

But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

Binyamin Appelbaum's story is well worth reading. If the Federal Reserve were a rank-and-file employee, they would have been fired long ago.

I don't know if Greenspan is trying to atone for past sins or actually learn from past experience. But when you have Greenspan and the World Bank in agreement with the likes of Elizabeth Warren, that Fed powers have grown too strong and a separate entity needs to be charged with protecting people who enter into financial arrangements, there clearly is a growing consensus here.

Postscript: Barney Frank's interview with Ezra Klein has some excellent insights. Frank feels we must limit securitization - the idea that if you spread enough risk around you could sell literally anything. He wants higher capital requirements and less leverage for the big banks as well.

Financial Reform Already Takes A Hit

The Obama Administration has begun the agonizing process of scaling back their financial regulatory reform package to please bankers. This one's going to be so ugly I'll have trouble looking at how the sausage is made.

In a step toward overhauling the nation’s financial regulation, a senior Democrat on Wednesday announced a plan that preserved the core of the White House’s proposal for a new consumer financial protection agency, while jettisoning a smaller though symbolically significant provision that had posed political obstacles [...]

An Obama proposal that Mr. Frank rejected would have required banks and other financial services companies to offer so-called plain vanilla products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

That proposal set off criticism by Democrats and Republicans, some with close ties to the banking industry, that it was the first step toward having government bureaucrats approve and disapprove an array of products.

At a hearing on Wednesday before the financial services committee, Treasury Secretary Timothy F. Geithner said: “There has been a lot of concern that if you invest the government with the ability to decide what’s appropriate here and there, that will lead to less competition and choice. The chairman’s proposals, which I’ve had a chance to read quickly, provide a better balance of choice and protection.”

Consumer groups are hanging their hats on the fact that the Consumer Financial Protection Agency hasn't been eliminated completely... yet. But Frank would exempt merchants, retailers, accountants, real estate brokers and IRA providers from any of its laws, and I would expect that list to grow. Banksters remain unconvinced that the CFPA needs to exist, and I'm fairly confident that they'll continue to advocate aggressively against it.

"We are pleased that a number of the issues we raised have been addressed," said Edward L. Yingling, president of the American Bankers Association. "At the same time, there are some very significant issues that still need to be addressed."

Among those issues, Yingling said, is that under the current proposal, states could go beyond the federal guidelines for consumer protection set by the new agency, an approach that financial firms say could lead to burdensome and conflicting regulation. A separate agency for consumer protection "still will have conflicts with the safety and soundness regulators," Yingling said. He and others also argue that the new regulator would be too powerful. "The agency still will have very, very broad, legislative-like powers. It can basically do anything it wants," he said. "We think that's a problem."

Also Tuesday, at an event outlining the chamber's objections to the CFPA, David Hirschmann, head of the organization's Center for Capital Markets, described the proposed new agency as an "overly broad, overly sweeping, big government solution."

It's good news that Frank pushed back hard against an alternate proposal floated by the Blue Dogs, but I fear we're seeing a slow walk toward something right in the wheelhouse of that alternative.

...Felix Salmon calls it the beginning of the end of meaningful reform:

There’s no good reason for this capitulation, except for the financial lobby has so effectively captured Congress that no reform would be able to get through with such a common-sense provision in place. This has nothing to do with the government “approving and disapproving a wide array of financial products”, it just says that anybody who wants to call themselves a bank should provide simple, basic banking products which aren’t prone to hidden fees and lucrative opacity. I fear that by the time Congress is done, the Consumer Financial Protection Agency won’t be able to protect consumers at all — and that’s assuming it’ll even exist.

Primarying The Federal Reserve

Much in the way that lawmakers can get pulled from the center to the left when primaried by a member of their own party, the Federal Reserve, facing the prospect of a Consumer Financial Protection Agency that would take away some of its power, is shifting to a more consumer-friendly position on lending practices, including getting rid of the dreaded yield spread premiums that incentivize lenders to screw their customers.

The Federal Reserve on Thursday unveiled a proposal to curb abusive lending practices by reining in compensation for mortgage brokers and by helping borrowers better understand the terms of loans available to them.

The plan, which builds on a similar effort adopted by the Fed last year, comes just as the central bank is trying to fend off a legislative initiative that would strip its consumer-protection role by creating an agency to oversee consumer financial products.

"It certainly doesn't hurt the Fed that they came out with mortgage lending rules that were tougher than most of the industry was expecting," said Jaret Seiberg, a policy analyst at Washington Research Group, a unit of Concept Capital.

The toughest part of the Fed's plan deals with compensation for mortgage brokers, who act as middlemen between borrowers and lenders. These brokers can be rewarded with extra fees for placing borrowers in higher-rate loans.

The proposal attempts to end this practice by barring lenders from offering extra compensation based on the terms of the loan, including the rate. Consumer advocates have long argued that incentive-based pay contributed to the subprime mortgage meltdown.

"This plan has got the potential to eliminate one of the worst practices in the mortgage market," said Michael Calhoun, president of the Center for Responsible Lending. "The devil will be in the details. Some of the worst actors in the industry have proven to be adept at exploiting weaknesses in rules. The final rule has to be tightly and carefully written."

However these things get into law is fine with me. Whether the threat of the CFPA entices the Federal Reserve to do its job, or whether a CFPA gets enacted and does it itself, ending the practice of paying off mortgage brokers for screwing their customers is a good thing.

Of course, these are forward-looking proposals. And however solid they may be, they do not deal with the current problem of people struggling to stay in their homes and stave off foreclosures, which is only growing. The current mortgage relief efforts are simply not working. I'm glad that Sheldon Whitehouse is signaling another look at cram-down, the idea of allowing bankruptcy judges to modify loan terms with the broker. You have to give the borrower some opportunity to dictate terms, or as we have seen the bank will not modify the loans.

But there is another option, and that's own to rent. Dean Baker has pushed this proposal prominently, and it's starting to get support on Capitol Hill.

There is a simple solution that requires no taxpayer dollars, requires no new bureaucracy and can immediately help millions of people facing foreclosure. Congress can simply temporarily alter the rules on foreclosure to allow homeowners facing foreclosures the right to stay in their home for a substantial period of time (e.g. seven to 10 years) as renters paying the market rent.

The lender would take ownership of the house and would be free to resell it, but the lease would carry over for the duration of the period designated by Congress, or until the former homeowner decided to move. In this period, normal landlord-tenant laws would apply, with the exception that the lender would not have the option to evict the former homeowner without due cause.

This rule change would provide homeowners with a large degree of housing security. If they like their current home, their neighborhood, their kids' schools, they would have the option to remain there for a substantial period of time. Furthermore, by making foreclosure a less attractive option for lenders, a right to rent law should give lenders much more incentive to pursue mortgage modifications as an alternative to foreclosure.

This change should also be beneficial for neighborhoods that are plagued by large numbers of foreclosures. Keeping former homeowners in their homes will keep homes occupied, preventing the blight that often comes from vacant homes that are not maintained.

The banks will fight this, but the overall housing market will likely rise from diminishing the glut of supply. The banks would get off the hook for a lot of the upkeep of blighted properties, the cycle of foreclosures could get stopped, and they would obtain consistent revenue streams in the form of rental payments, while still holding the potential equity of selling the home. I really, really like this idea.

...of course, the Fed's nods toward consumer protection won't be enough for people like William Greider, who think it ought to be dismantled. I think it's hard to argue with Greider, considering he knows as much about the Fed as any human being alive.

Not Stupid, Just Secure In Their System

A few days ago, AmericaBlog asked if Goldman Sachs was tone deaf, politically stupid or foolish to boast about high bonuses during a recession. I think the right answer was "they know they can get away with it." Indeed, those record profits from the banks were a feature, not a bug. The government decided to indirectly bail Goldman and other banks out by allowing them to make bushels of money, much of it handed over by the Feds, and essentially recapitalize themselves. It hasn't fully worked, and much of it is illusory, but it's worked enough to give profits for now to a lot of banks, and as a result, compensation shoots up. That's just a byproduct of the decision on how to help the banks out of their mess. That decision itself gets clearer when you look at the revolving door between D.C. and Wall Street, which apparently doesn't stop even if the individual in question helped to fund the Sudan genocide.

As for the political pitfalls of announcing record profits right at the beginning of talks over financial regulatory reform, that doesn't appear to be a great obstacle, either.

Intense lobbying pressure from Wall Street has slowed the progress of a major piece of financial regulatory reform legislation. Financial Services Committee chairman Barney Frank (D-Mass.) informed committee members Monday night that a vote on the creation of the Consumer Financial Product Safety Commission will be pushed back until September.

"We wanted to give consumer groups and their allies time to work with their members, organize and get their message out," said committee spokeswoman Elizabeth Esfahani. "So far in this debate, we've only heard from one side, the banking lobbyists, so we want to give both sides time to be heard."

The setback is a wake-up call for Democrats, said Rep. Brad Miller (D-N.C.), an original sponsor of the measure.

"Now some of those who thought with a conciliatory approach we might get agreement, I think they now know that it's going to be a battle," said Miller.

Further undermining the efforts to create a Consumer Financial Protection Agency, beyond the bank lobbyists, is the chairman of the Federal Reserve Ben Bernanke, who thinks that the Fed can manage that on their own. Of course, the Fed is a quasi-governmental partnership with... those same big banks whose lobbyists want to tear the heart out of the CFPA. I'm not hopeful that the Federal Reserve would somehow become this uber-regulator over those who partially own them.

Brad Miller is sure to not give up on this, nor will Elizabeth Warren, who can be credited with the idea. Her article on the myths of a CFPA is must-reading. But clearly, they have a big set of hurdles, not the least of which is the perspective that the bankers still "own the place" when it comes to cracking down on them in any meaningful way.

Sure, Goldman won't be able to get everything it wants. After haggling over the purchase of government warrants, they paid them off at a solid price for taxpayers. But that's a small price to pay for keeping the regulatory efforts in their direction.