What the Consumer Financial Protection Agency Means for You
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Fresh off of the heels of Congress’s passing of the Credit Cardholders Bill of Rights, President Obama sent a proposed law to Congress, which if enacted, would create a shiny brand new Consumer Financial Protection Agency (CFPA). The agency would not only help enforce the Credit Cardholders Bill, it would expand into the broader scope of consumer protection. Treasury Secretary Geithner summarized the agency by saying, “This agency will have only one mission – to protect consumers”.
Knowing exactly what the proposed CFPA would mean for you is based largely on speculation at this point, and the full effects may not be seen for years (and the bill isn’t expected to go to vote until this fall or beyond). However, it’s fair to say that the primary reason behind the proposed creation of the new agency would be to police and put an end to the type of greedy and unfair predatory practices by financial institutions (mostly banks and credit providers) that has resulted in many borrowers suffering from undue financial hardship.
Citing the agency’s crackdown on predatory mortgage lending techniques, President Obama states, “You’ll be able to compare products and see what’s best for you. The most unfair practices will be banned. Those ridiculous contracts with pages of fine print that no one can figure out – those things will be a thing of the past.” Although, I find it hard to imagine that my next mortgage closure will result in anything less than a headache and a mild case of carpal tunnel, having an agency focused on enforcing simple, concise, and clear terms is certainly a step in the right direction.
According the White House’s official press release on financialstability.gov, the CFPA would
1. Provide protection against unfair credit card rate increases and late fee traps: The agency will enforce the credit card bill enacted by Congress and President Obama this spring, taking responsibility for enforcing the ban on unfair rate increases and for the implementation of new rules preventing late fee traps.
In other words, the Credit Cardholders Bill of Rights that was passed recently, but doesn’t go into effect until mid 2010 needs a governing body. The CFPA would be that governing body.
2. Set guidelines for simple “Plain Vanilla” products: The agency could create guidelines for standard mortgages without prepayment penalties; that are fully underwritten with documented income; that collect escrow for taxes and insurance; and have predictable payments.
Remember all of those funky ARM’s, jumbo loans, and other sleek mortgage names masking a product that is designed to rip you off? The CFPA would seek to put an end to these type of products.
3. Duties of care for mortgage brokers: The agency could require mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, and a duty to help ensure that only appropriate loans are offered.
A colleague who once worked for one of the nation’s largest mortgage lenders once told me that ‘in the good ole days’ mortgage underwriters would look for any possible reason to offer the largest loan possible and ignore little technicalities such as the borrower not providing proof of income. The goal of the CFPA would be to put an end to this type of practice and ensure that financial institutions are offering the right loan amounts to the right people in the right situations.
4. Ban unfair side payments: The agency could ban unfair practices such as “yield spread premiums” – side payments from lenders that encourage mortgage brokers to push consumers into higher priced loans.
Essentially, what the press release is trying to say here is that the CFPA would monitor and attempt to put an end to broker/institution side arrangements that are designed to steer you into a mortgage that may not be the best for you, but results in the mortgage broker getting a commission.
If you’d like to curl up and read the full version of the CFPA-Act bill, you can check it out here.
The Opposition
The financial industry will surely be up in arms over the bill, because it provides the type of oversight that they have been able to evade for so long. Opponents argue that the CFPA would limit product innovation and dictate what type of loans consumers should receive in certain situations.
Didn’t product innovation and offering ‘customized’ loans mostly get us into this mess?
For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.
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19 Comments so far
leave a commentThis is a novel idea. Two things we need to keep an eye on, though. We really don’t need another government agency to police the financial industry. There already are about a dozen of them. Why can’t any new laws be incorporated into an existing agency?
Secondly, Wall Street will be able to water down much of what’s proposed now and before anything will be voted on. That’s the sad truth.
Personally, I don’t want the government to stick its nose in anywhere! I’m a grownup. I can make my own decisions. If I make a mistake, that’s my problem.
The way I see it, a huge percentage of these people that got the bad loans either lied (institution beware) or didn’t read the contract (buyer beware).
Freedom means we have the right to make stupid decisions as well as good ones. DO NOT TAKE MY FREEDOM AWAY!
This isn’t the problem. The problem is that our society doesn’t want to punish reckless behavior from both the institutions AND the customers. I’m 23 and everyone has always been told to beware of the fine print – it’s nothing new. I’ve made that mistake and I quickly learned through trial and error. I didn’t need a multi-billion dollar bureaucracy to teach me that – it’s common sense. The problem is people aren’t taking personal responsibility for their actions. If you don’t understand the terms of a credit card – DON’T SIGN IT! Reward firms that have honest terms for loans, credit cards, etc. by using their services. This bill rewards bad behavior from these companies and says people aren’t smart enough to make decisions on their own – government agency #3201284 will do it for you.
I do agree that the terms are ridiculous, but we need to take matters into our own hands. Without us as customers, these firms don’t exist. If we were smart and stood up for ourselves, a new company would come out and say: hey, here are the terms in 3 easy to read lines. They’d get all the customers and likely force the others to comply.
If not, then the government should just say: “look, keep it down to x lines, make it clearly understandable, standardize the terms/conditions, etc.” – and they would have to comply. Instead, we need a fancy new agency to interpret poorly written terms into something you can understand. How does that make any sense?
This is a joke – and a metaphor for what our government has become. If you’re not a free market guy then just pass a law requiring specific standards for terms – this just creates unproductive jobs and burdens the taxpayer.
“I’ve made that mistake and I quickly learned through trial and error. I didn’t need a multi-billion dollar bureaucracy to teach me that – it’s common sense. The problem is people aren’t taking personal responsibility for their actions.”
Like getting a credit card with a rate of 6% that was quickly turned into 30% with no recourse?
Who do you work for? citibank?
Without government protection what recourse do consumers have from predatory lenders? none.
“undue” It is clearly due. A person knows when they don’t have enough money to buy something. Credit card companies make there money based on the sheer greed of the consumer. They know they can’t afford something but they get it anyways on credit. Though getting rid of the temptation will make it easier for consumers not to screw themselves
It is unfortunate that many people have fallen into bad habits when it comes to credit cards and home loans. Many of the things this article, the CFPA, and Congress decry as foul are actually very helpful and it is an uneducated consumer who misuses these tools. One of the biggest examples is the general inability to understand when to use and Adjustable Rate Mortgage, ARM, and when not to. Having been around this business my whole life I’ve seen the benefits. Here’s an example;
Guy making average income, or less, in medical school wants to buy a $500,000 house. He knows that when he graduates he’ll make $300,000/year. More than enough to afford the house. Home prices are increasing and he wants to get in the market now and not wait a year. An ARM is a great option. He can buy the house now knowing that in a year when he’s making more money he can refinance to a fixed rate that he would not be able to afford today. This allows him to get in the market now and purchase the home at a lower price.
People who do not understand something should not use it. If you haven’t read your credit card companies fine print and understand how they can, and will, take all your money, then don’t use credit cards. Stop ruining it for the rest of us who know how to live within our means. Clearly it is not just the banks that are at fault but also foolish consumers who don’t educate themselves before they spend money they don’t have.
sounds great in theory, but this isn’t telling the whole story.
Banks also have their own version of “yield spread premium”, which is called “servicing release premium”. Unlike yield spread, banks aren’t required to disclose this under current laws, whereas brokers must disclose yield spread both upfront and again at closing. Again, this is nothing new, it’s been around for years. In the end, this will run all mortgage brokers out of business while giving banks 100% control. So somehow the government thinks less competition will be better for consumers. (HINT-they know it won’t, people! BANKING LOBBYISTS WROTE THIS BILL!!)
If they really wanted to protect consumers, why don’t they outlaw prepayment penalties, ARM’s and other loan features that make them preditory, regardless of whether they are originated by a banker or broker? Instead we have legislation that’s cloaked as consumer protection when it is in fact a crafty piece of legislation written by banking lobbyists that will result in an oligarch of banks controlling the mortgage market. Think about it for a second. Was Lehman Brothers a BROKER? Was Countrywide a BROKER? Was Washington Mutual a BROKER? Nope. They were banks. They did buy loans from brokers and it would be stupid to claim that brokers weren’t part of the problem, but these banks also had their own retail operations that were selling the same products with the same back end yields and the same preditory features (prepay penalties, negative amortization, etc) as mortgage brokers. Not to mention they UNDERWROTE BROKERED LOANS in the first place. So getting rid of brokers isn’t going to fix the problem, nor will it protect consumers. This is a complete joke and bankers are laughing all the way to the….well, nevermind.
I don’t agree this issue!!
Sounds like the Credit Cover Act that we have in SA. There was lots of flack from the banks when it was signed into effect, but most economists agree that its one of the reasons South African consumers were not that hard hit by the financial crisis.
“Didn’t product innovation and offering ‘customized’ loans mostly get us into this mess?”
Nope. Good try though.
don’t understand – is this saying the govt will create a specific savings account for me and funnel money into it from payments i’d ordinarily receive? i keep seeing versions of this all over the web and they conflict. is the government actually telling me i have to save a certain amount and forcing that to happen? EXPLAIN please.
I can’t tell you how much I disagree with the implementation of this agency.
First, financial products are made to be risky. Thats the entire point.
Second, its not clear to me that the proposed bureaucracy won’t just get in the way of innovation. A lot of people don’t get this but financial innovation is a very important part of history. For example, the first joint stock corporations in the netherlands in the 1600s made international trade a reality by leveraging the wealth of a lot of smaller investors, thus making transatlantic voyages are fiscal reality. Many other examples about, but since the main goals of government is to increase its size and influence, I am concerned that this agency will just get in the way.
Plus, it will cost a lot and taxes are quite high enough already.
Best,
James
First, financial products are not made to be risky. The whole idea of free markets and the freedom to contact is based on the assumption that consumers are informed and rational and make decisions which maximize their utility.
Since the colonial era there were protections in place at the state level (usury laws) which capped interest rates, but in 1978 the Supreme Court essentially said States could no longer protect their own ctizens. In 1980, Congress passed a law which explicitly preempted state consumer protection.
Your concern that a consumer agency would get in the way or restrict financial innovation is understandable, unless you realize that all 5 federal financial regulators already have consumer protection missions. The problem is that the same regulators are also tasked with ensuring bank saftey and soundness. (i.e. are profitable) and the fact that banks can choose their regulator by changing their charter means regulators compete for buisness and the right to collect fees.
The most obvious problem with placing both saftey and soundness regulation and consumer protection under one roof is that predatory lending is, by definition, profitable.
Last, not all financial innovation is good. more complex and confusing payment structures are not innovative in the sense that they are valuable for consumers. And financial innovtion is not the same as other types of innovation–take pharmaceuticals for an example. If a new type of financial product is delayed a year -it is not the same the cure for cancer not being available for consumers.
Anyhow–this is an interesting issue. Take care
I can not totally agree with your opinion.
I think the CFPA is a great idea. People who think things are great as it is are just not up to date with the real world issues or haven’t been affected by them. Sure, everything is always cool the way they are until it hits home. I am just sorry that this agency won’t come into affect much sooner.
We are living in a time whereby there is no such thing as good, honest business practices anymore. There will always be wolves in sheeps clothing. I was recently put in a very difficult position with my credit card company. I have a DISCOVER CARD and a few months ago they apparently changed there due date on me. Instead of payment due on the 6th it was moved to the 1st without a warning, no letter informing me. As a result, I made my payment at the end of the month as always and came my August bill, I was hit with a late fee and high finance charges. The company argued that they sent a letter notifying me of the change. It is August 14th and I am still waiting for a reprint. I called in and spoke to a rep and I was told to make my usual payment and that the account would be adjusted. Come September 1st bill, it reflected a higher payment due and my APR was moved from 19.24 % to about above 27.%. When I stated my account has always been in excellent payment status, I was told to make the larger payment before the original APR would be reinstated. If I didn’t have the money to make the larger payment, I would have been in trouble and speeding down a slippery slope. After this occurance I sent out a note on Twitter and 183 of my 8,000 or so followers wrote back having the same issue. 109 of the 183 had the same issue with DISCOVER. Chance occurance, I doubt it.
I understand Darlene’s frustration with her credit card, but credit card companies are the most impersonal financial firms in existence. They will do what they please and all you can do is to be put on hold for 30 minutes to be told “sorry, we sent a letter” or “that is policy”. I think one of the major problems we face or misconceptions is that all banks, credit card co, and etc. are wolves in sheep’s clothing. A handful of companies including credit card companies, investment banks, and mortgage companies have taken huge risks and put consumers at huge risk. Question? Where do most people in America do their banking? With Community Banks! Community Banks consist of people you are in church with, see them at the grocery store, kids play sports together, answer the phone themselves when you call a branch, and sit across from you when you are in need of advice or need help. Community banks are not investment banks, most do not provide credit cards, and do not deal in the derivative markets, but they are painted with the same brush as the ones you see and hear about in the news. Therefore, the majority of people will not be affected by changes to credit card companies or mortgage brokers, but changes at the local banks. The consumer protection agency is more like a “Consumer you have choice A or B Agency.” Part of this agency will remove the traditional community banking model that has done very well and who knows where it will end. If you were wondering, yes, I do work for a small community bank. Thank you!
This has made me mad since day one, and with all that has happened over the past few days i couldn’t agree more with the posters above. I get so feedup with the whole ordeal I can’t even talk…
“… Money does not buy happiness..” whoever said that was probably a rich bastard. No I do not agree with the statement, but it sure is easy to say that when you are well off. Same goes for those who hate government intervention in their life. That is easy to say when you are not one of those hardest hit by this lawless bankers. You as well as those bankers are the first ones in line crying for help when thing go upside down. The rest of us are the ones in charge of bailing you out after you ran away with our money. I would suggest you look up the video “Money as debt” and the story tittled “10 million monkeys” (will be glad to post it here if you can’t find it). Let me clarify I don’t expect the government to do everything for me, but regulation is necessary evil. I don’t care how much different credit cards are from invesment banks, the same lawless phylosophy runs in their blood. For Darlene, credit card companies have (or use to have until recently) the freedom to change around your due date without notice. They use certain rules that can be understood if you have a free weekend to spend on it. Things like 20 days after end of billing cycle but not if it is a holiday… and the story goes on. Is much more complicated than that. To give you an example, there are months where my credit cards is due twice on the same month. I am not talking about having two billing cycles in one month, I am talking about July being due on August 1 and August due on August 30. There are also some tricky rules. Your payment can be due on a non-working day, but payments can not post on a non-working day (Bank of America if you are wondering). So if your card is due sunday but you didn’t pay by friday… well, you well know the rest of the story. How about bank statements? I don’t know about your bank. I have seen stories of large banks doing this but mine a community bank. Yes, those people who call themselves my neighbor. I am continously hit with OD fees, yet my account does not show a negative balance. They say is because I did not have enough “available” funds at the time. My point is that even when I keep a carefull log of my spending, I can not trust them to put the transactions in the same order as they happened. Yes they need to clear, yes it takes time, but the date and time of the transaction does not change. Their online and phone banking system say one thing, but their computer system says another. I am not asking for free money, I am asking for consistency, clear information that will allow me to make the right decision. That is what I expect the government to do for me. Regulate those who do not behave. Empower those who do.Excuse my bad english, I am a spanish speaker. I make $55K a year in a poor area where the median income is only $12K. I did not speak a word of english when I first came here. I was never here ilegally, I never received help from the government or files taxes with anything else than a 1040EZ (those who claim their dog food, you know who you are). I did all of that for myself, by myself….oh, almost forgot, I have never been given a bonus over $700.