Protecting Consumers Or Inhibiting Lenders?

style=’font-size: x-large’>Next month, the House of Representatives will resume debate on H.R.3126, the Consumer Financial Protection Act of 2009. The legislation, based on an initiative developed by the Obama administration, was introduced by Rep. Barney Frank, D-Mass., and Rep. Maxine Waters, D-Calif., and includes the creation of a new federal entity called the Consumer Financial Protection Agency (CFPA). In testimony last month before the House of Representatives, Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, noted that the new agency would cover an unusually large amount of regulatory territory. ‘The CFPA, as proposed by the Obama administration, is intended to be an independent agency with sole rule-making and enforcement authority for all federal consumer financial protection laws, with the exception of those covered by the Securities and Exchange Commission and the Commodity Futures Trading Commission,’ he says. ‘The draft legislation submitted by the administration gives the agency jurisdiction over all companies, regardless of size, that are engaged generally in providing credit, savings, collection or payment services. This is accomplished by transferring to the CFPA most or all of the authorities in 16 federal statutes that cover lending, mortgage financing, fair housing, credit repair, debt collection practices, fair credit reporting, and a multitude of other consumer financial products and services.’ Within Washington, the proposed agency has created something of a turf war between the Obama administration and Federal Reserve Chairman Ben Bernanke, who has voiced opposition to having regulatory authority transferred from his agency to the new CFPA. Industry observers have a mixed reaction to the CFPA. Although some believe the notion of an agency that specifically focuses on protecting the rights of consumers is well intended, others express concern that the new agency will wind up being too overprotective – to the point of inhibiting the full recovery of the ailing mortgage banking industry. For Dr. Anthony Sanders, professor of finance at George Mason University in Fairfax, Va., having a single regulatory entity that would focus on the financial protection of consumers would help chop away layers of overlapping regulatory entities in Washington, D.C. {OPENADS=float=left&zone=15} ‘I think integration on consumer-protection regulation is long overdue,’ he says. ‘On mortgage lending, for example, we have the Fed, the Department of Housing and Urban Development, the Federal Trade Commission, and who knows who else all trying to write regulations. Integration is good – or it should be, if done correctly.’ Dr. Charles Geisst, professor of finance at Manhattan College in the Bronx, N.Y., and author of ‘Wall Street: A History,’ concurs. ‘It addresses one of the major shortcomings of U.S. financial regulation as we know it,’ he says. ‘The crisis has shown that, despite the fact that regulation was in place, it was inadequate. That still needs tightening up.’ However, questions are being raised on whether a new agency is needed or if existing regulatory agencies need to do a better job. Michael L. Larssen, president of Larssen Consulting in Clearwater, Fla., acknowledges that Washington isn't lacking in regulatory entities. ‘It is hard to argue against an agency that has such a distinguished name,’ he says. ‘I think the intent of a centralized focus of one agency for the benefit of the consumer is the main point. All of these bodies that do things differently create a real struggle to work through. The challenge is why a new agency needs to be created when existing agencies have the authority and haven't used it.’ One key problem among the agency's critics is the requirement for lenders to offer what is called ‘plain vanilla’ products and services, which are defined as ‘standard consumer financial products or services’ that are ‘transparent’ and ‘lower risk.’ Wallison worries that forcing originators to offer these types of products will inhibit product innovation. ‘This idea, seemingly quite simple, raises a host of significant questions,’ he says. ‘If there is a plain-vanilla product, who is going to be eligible for the product that has strawberry sauce? In other words, once the baseline is established for a product that can or must be offered to everyone, who is going to be eligible for the product that, because of its additional but more complex features, offers financial advantages?’ Mark Calabria, director of financial regulation studies at the Cato Institute, echoes this apprehension. ‘If you want to offer adjustable-rate mortgages (ARMs), it will be almost not worth the while,’ he says. ‘If you have the government come up with a standard product, it is almost offensive – why not have literacy tests to get an ARM?’ Calabria adds that the CFPA would be structured in a way that would cancel the checks and balances that exist in the multi-layered regulatory structure now in place. ‘Consider the people who do Community Reinvestment Act enforcement,’ he continues. ‘They approach it by believing every bank is not doing enough lending. But working in the regulatory agencies is someone else who looks at this and is saying, 'Slow down a bit.' My concern is a consumer protection agency with no concern for safety and soundness and no discussion of balance.’ Sanders agrees, stating that this is the major stumbling block of the CFPA schematic. ‘I think the section that requires lenders to offer plain-vanilla products is horrible,’ he says. ‘What defines plain vanilla? Are free prepayment options plain vanilla, or are low-cost, no prepayment option loans plain vanilla?’ For Thomas Pinkowish, president of Community Lending Associates in Essex, Conn., another key problem is who is going to be enforcing these regulations. ‘To set up a huge new agency, where are they going to find the people to run it?’ he asks. ‘Are they going to rip them out of existing agencies? Everyone there will have to learn what to do. Think of the cost of recreating the wheel, which will be passed on to consumers – it is better to spend money on existing examiners and enforcing existing laws.’ If the CFPA becomes a reality, it could easily be attributed to the negative image that many Americans have of the financial services industry. ‘To justify this new level of interference in the market, the government relies on the myth that the financial crisis, including the precarious finances of those who borrowed money through mortgages or maxed-out credit cards, is largely the fault of devious lenders manipulating and exploiting innocent consumers,’ says Alex Epstein, a business analyst with the Ayn Rand Institute in Irvine, Calif. ‘This is nonsense – no one has provided any evidence for a mass epidemic of fraud. The crisis is fundamentally the result of borrowers and lenders knowingly lowering their standards, incentivized by a government that, in effect, lent out money for free (below the rate of inflation), that guaranteed risky mortgage loans and that repeatedly denied a real estate bubble. It is government manipulation, not lender manipulation, that caused Americans to take on enormous, unsustainable amounts of debt.’ For David Lykken, managing partner of Mortgage Banking Solutions in Austin, Texas, CFPA may not be the end of the regulatory road, but a beginning of a new and potentially unpleasant journey for mortgage bankers. ‘It is not a surprise that the blame for the unraveling of the entire economy lands at the feet of the housing and mortgage market,’ he says. ‘Brace yourself – this is the tip of the iceberg. It will add a burden and cost structure to doing loans – which will be paid in fees to consumers. Yes, the consumers are the very ones who will be paying for this.’ [i](Please address all comments regarding this article to Phil Hall, editor of [b]Secondary Marketing Executive[/b], at hallp@sme-online.c

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