New Consumer Protection Agency Floated for Mortgages, Other Financials

The Obama administration appears to be floating a trial balloon to test the viability of a proposal that would consolidate authority over consumer financial products such as mortgages and credit cards into a single agency.

Reports in the Washington Post, Wall Street Journal and Bloomberg News today cite unnamed administration officials who disclosed details of the plan on conditions of anonymity. The proposal was apparently the subject of a dinner meeting of senior policymakers Tuesday night, including Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers.

The proposal, which would require congressional approval, would concentrate authority over consumer financial products into a single agency. That authority is currently spread among multiple agencies, including the Federal Reserve, FHA/HUD, FDIC, Securities and Exchange Commission and Federal Trade Commission, among others. It is not yet clear whether a new federal agency would be created or whether the authority would be consolidated into an existing agency.

Insurance, mutual funds could be included

Details of the proposal, including which consumer financial products would be included, are still being worked out, according to the unnamed administration sources. One possibility is that the agency would include authority over insurance, which currently is not regulated at the federal level, as well as over mutual funds.

The Obama administration has made reforming and strengthening the regulation of the financial industry a major priority in the wake of last year's collapse of several major Wall Street firms, including Bear Sterns, AIG and Lehman Brothers, and subsequent economic meltdown. The administration has insisted the government needs more authority to regulate large financial institutions and potentially volatile financial instruments such as hedge funds and derivatives, as well as to monitor and take steps to avert systemic risks to the economy.

A Consumer Product Safety Commission for financial products

A primary advocate for a consumer finance regulatory commission is said to be Obama financial advisor Elizabeth Warren, a Harvard law professor who chairs the Congressional Oversight Panel overseeing the Troubled Assets Relief Program (TARP) designed to prop up ailing banks. Warren has called for the establishment of an agency that would oversee consumer financial products in much the same way that the Consumer Product Safety Commission sets standard for such products as toys, barbecue grills and household cleaners.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote in a 2007 article in the journal Democracy. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street."

The plan appears to be driven in part by concerns that the agencies currently responsible for regulating consumer financial products are primarily focused on "big-picture" issues rather than consumer concerns. The Fed in particular has been criticized for failing to regulate mortgages more closely during the growth of the housing bubble, while HUD has drawn complaints for not exercising its authority to rein in excessive closing costs on mortgages.