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New Consumer Financial Regulation

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The White House is proposing a realignment of the financial regulation that failed to prevent the latest recession, but will the proposals help protect consumers? There is a long way to go between the President’s proposal and the enactment of a law, but here are the highlights as the plan stands today.

The Financial Services Oversight Council, run by the Treasury, will “help fill gaps in regulation, facilitate coordination of policy and resolution of disputes, and identify emerging risks in firms and market activities.” They will have the power to gather information from any financial firm to identify risks. The Council will be composed of one leader from each of the federal financial regulators.

Not only banks will be regulated. Any company whose size allows its instability to threaten the stability of the economy will be within the scope of the increased regulation.

There will be no more federal thrifts.

Hedge funds and other private pools of capital will be required to registers with the SEC.

The government will create the Consumer Financial Protection Agency (CFPA). This agency stands to be one of the strongest in terms of ability to create and enforce regulations throughout the financial industry. The organization will focus on transparency, simplicity, fairness, accountability, and access.

Along with the elimination of federal thrifts, the Office of Thrift Supervision (OTS) will also disappear or be incorporated into other regulatory agencies. Interestingly, this is the one regulator bankers like. In the current environment, financial companies can often shop around for their favorite regulator, and the OTS has often been chosen thanks to their hands-off approach. OTS was the supervisor of choice for the failed companies IndyMac, Countrywide, Washington Mutual, and AIG. Other regulators were not immune, however.

Just like the FDIC helps banks fail in an organized manner rather than allowing the failure to spur chaos, the new regulatory system would do the same for all other large financial companies.

Penelope Wang from CNN explains how these regulations might affect consumers.

  • Consumers will have access to “plain-vanilla” mortgages with simple terms and pricing. In my opinion, these are almost guaranteed to be more expensive thanks to the simplicity premium.
  • Brokers will not be encouraged to “suggest” customers choose unaffordable mortgages.
  • Some overdraft loan changes will require customers to opt in to overdraft protection.
  • Regulators would enforce fair lending laws so more low-income families would have access to financial services.

New Foundation, New Stability, Jesse Lee, The White House, June 17, 2009

Updated January 12, 2018 and originally published June 18, 2009.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 3 comments… read them below or add one }

avatar 1 Anonymous

Good stuff to know, and as you said it will most assuredly change before enacted into law. However, I don’t see why you assume the “plain vanilla” mortgages will end up costing more just because they are simple. My job is doing programming for a payday loan company, and I read a lot of the legalese their lawyers come up with to rip people off even more. I also have had to deal with the law changes that have been mandated to make things easier for the consumer, such as prominently displayed interest rates and payback amounts. This didn’t make the loans any more expensive, except for the company having to pay by the hour for my services. Rates did not go up. So, just a comment there on that, I think your pessimism on the rates being higher there is a bit premature, and probably unfounded based on my previous experience.

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avatar 2 Luke Landes

David: My impression that loans will be more expensive comes from the fact that companies don’t like to have mandated products; if they were good for business, they would be offering “plain-vanilla” products already. Since they mostly do not offer “plain-vanilla” products currently, it is safe to assume that these would not be as profitable as existing products, and if they are not as profitable it would be good business sense to make up for that somewhere. That may be in the form of higher rates, hidden fees that find a loophole in the regulation, or perhaps the difference in profit would be made up in some other product.

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avatar 3 Anonymous

“Not only banks will be regulated. Any company whose size allows its instability to threaten the stability of the economy will be within the scope of the increased regulation”

Are they going to eliminate the central bank, the Federal Reserve? That and fractional reserve banking are the cause of inflation (expanding money supply = lower purchasing power of money). Allowing the Fed to inflate the money supply is what causes the booms and busts, this “business cycle”. How about looking at the source to fix the problem instead of wasting time elsewhere.

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