WASHINGTON — Health care reform has drawn most of the attention on Capitol Hill lately, but for home buyers, sellers and mortgage applicants the legislative ball game will really get under way in September, when Congress begins serious work on the proposed Consumer Financial Protection Agency.
Legislation to create the agency is pending in the House, pushed by Financial Services Committee Chairman Rep. Barney Frank, D-Mass., who is its principal author. The Obama administration had outlined a similar plan at the end of June and considers passage of a bill a top priority.
Why should you care? What might the new agency do for you — or to you?
To begin with, you should be aware that the agency's powers and oversight would extend far beyond mortgages and real estate — into all credit cards, debit cards, consumer loans, payday loans, credit reporting agencies, debt collection, stored-value cards, and even investment advisory and financial advisory services, to name part of the list.
It would have the authority to alter long-common practices that nettle consumers, such as mandatory arbitration clauses in the fine print of contracts that automatically send all business-consumer disputes to arbitrators rather than to courts. The new agency could ban or limit such clauses in specific products if they are shown to tilt against consumers' interests.
The CFPA would write the user-safety rules for virtually all consumer financial products, and would have the legal firepower to levy huge fines and prosecute lenders, brokers and others who break the rules.
The agency would be the dominant federal consumer protector in home real estate settlements. It would regulate "affiliated" title, escrow and financing businesses connected with realty firms and builders. It would oversee equal credit opportunity and fair housing, and would set standards for all mortgage offerings, whether from the biggest banks or the smallest brokers. Generally it wouldn't seek bans on mortgage products that carry elevated risks — interest-only loans, for instance — but would require that lenders restrict such mortgages to well-informed applicants who can document that they understand the risks and can afford the payments.
The agency would be tasked with creating consumer-friendly, uniform disclosures for all home purchase and financing transactions, starting with a combined "good-faith estimates" and truth in lending statement.
The core idea behind the proposal, supporters say, is to pull together consumer oversight powers that are now scattered among various agencies, and to put consumer interests where they should be — much higher on the priority list than they were during the years leading up to the housing and credit bubble and bust.
Banking and mortgage trade group leaders generally agree that the existing regulatory system failed badly — for consumers and the industry itself.
"Are reforms needed? Yes, absolutely. We're in favor of better consumer protection," says Anne Canfield, executive director of the Consumer Mortgage Coalition, a trade group that represents major mortgage originators and banks.
But handing over consumer protection and enforcement powers to a separate agency that might not understand the business side of the ledger could be a burden for lenders, they argue, and could add bureaucracy and nightmarish legal liabilities. Mortgage Bankers Association president John Courson says the CFPA could "stifle innovation" and limit consumers' choices in home loans and other financial products.
But proponents such as Harvard Law School professor Elizabeth Warren say the industry's criticisms about stifling consumers' choices and reshaping banking industry regulation are simply efforts to preserve the status quo.
"If the status quo is about choice," asks Warren, "then explain why half of those (consumers) with subprime loans 'chose' high-risk, high-cost loans when they qualified for prime mortgages." The people were steered to those loans by lenders, brokers and Wall Street promoters who were not required to explain the risks, she says.
Outlook for the bill: Passage in the House appears likely. Count on the banks to mount their biggest battles in the Senate.
Ken Harney can be reached at firstname.lastname@example.org.