Obama Administration Praises Consumer Protection Bill, Deflects Criticism Of Loopholes
The Obama administration on Friday strongly praised a House committee's vote to create a new federal consumer financial protection agency, despite the fact that the bill exempts more than 98 percent of banks from annual oversight by the new unit.
Michael Barr, the Treasury Department's assistant secretary for financial institutions, said on a conference call with reporters that the agency "would provide an important voice for consumers across the country." While the bill's passage out of committee has been nearly universally acclaimed by consumer advocates, groups still point out loopholes that in a perfect world would be rectified later in the legislative process.
One such loophole is the carve-out provided to commercial banks with less than $10 billion in assets. Unlike its larger competitors, such as Citibank, Bank of America and Wells Fargo, these banks would not be subject to annual exams by the new consumer-focused body. Of the nation's 8,200 banks, only 117 of them would be specifically targeted; those nearly 8,100 smaller banks cumulatively hold about $3 trillion in assets.
The new agency would have power to regulate things like credit cards, personal loans and it "would be able to take on important failings in the mortgage market," Barr added, "where we had mortgage brokers selling mortgage loans to people knowing they didn't make any sense for them."
As of June 30, the nearly 8,100 banks that would not be subject to annual review hold on their balance sheets more than $603 billion in home loans -- nearly $120 billion of which are adjustable-rate mortgages, the kind of mortgages that analysts and experts fear could lead to a severe uptick in foreclosures in the next few years as interest rates reset to a higher level. Those banks also hold nearly $25 billion in delinquent home mortgages, according to banking data maintained by federal regulators.
Barr disagreed with critics, though, maintaining that the legislation that passed Chairman Barney Frank's House Financial Services Committee "did not exempt smaller institutions from review." Specifically, Barr noted that the agency still would have the power to write and enforce consumer protection rules.
In addition, the agency would be able to accompany the existing bank regulator when conducting its exams of these smaller banks. The administration's original proposal did not include this exemption. It was added to placate conservative Democrats and Republicans who were concerned about the proposed agency's power over smaller banks.
"During the legislative process, there's always a give and a take. There's never a proposal that an administration puts forward that's 100 percent of everything it wanted," Barr said.
A spokeswoman for the Center for Responsible Lending, a nonprofit consumer advocacy group, said they were generally pleased with the bill, but added the group was concerned about the exemption granted to banks with less than $10 billion in assets.
"The bill could be tightened up," said Kathleen Day, a CRL spokeswoman. "It should cover all institutions and all types of financial products. Otherwise, what's the point?"
In addition, though proponents of the bill play down the smaller-bank exemption by pointing out that the proposed agency could send its examiners to bank reviews if it chose to, the question remains whether the agency will have the resources needed to send examiners to every bank exam. If it doesn't have the bodies or the resources, it just can't do it.
That could lead to problems in the future if the current language in the bill makes it into law. If the new agency could send its examiners to check on things like deceptive credit card and lending practices at smaller banks -- but it isn't mandated -- the next fight could be over funding.
"It's a time-honored lobbying trick," said someone involved in the current debate, who spoke candidly on the condition of anonymity. If the current provision survives, "the next fight will be to scale back [the agency's] funding, to tinker with its resources," this person said. "There's a lot of ways to skin a cat."
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First Posted: 10-23-09 07:24 PM | Updated: 10-23-09 09:05 PM