Financial Regulatory Reform: A New Foundation The Time for Action & Overview of Recommendations October 14, 2009
The Time for Financial Reform is Now What Happened
Responsible American families and businesses are paying the price for the careless behavior of financial institutions and an outdated regulatory apparatus that was unable to protect the financial system
Between last October and December alone, families lost $5 trillion in household wealth
Fighting financial panic has required the government to make substantial commitments of taxpayer money
3 The Time for Financial Reform is Now What the Administration is Doing About it
In June, the Administration released a comprehensive proposal for financial reform.
In August, the Administration sent detailed financial reform legislation to the Hill
The Financial Reform Proposals Directly Address the Causes of the Crisis Reforms will Protect Consumers, Investors & Taxpayers Causes Inadequate consumer & investor protection Key Financial Reform Proposals Creation of a Consumer Financial Protection Agency Strengthened investor protection 6
Financial Reform Will Protect Consumers of Financial Products Overview Multiple regulators… One regulator for banks and non-banks… CFPA No federal supervisor for non-bank sector… Banks and non-banks 7
Financial Reform Will Protect Consumers of Financial Products Benefits of Consumer Financial Protection Agency (CFPA)
Ensure consumers get the clear information they need about loans and other financial products from credit card companies, mortgage brokers and others
Protect consumers from deceptive mortgage lending
Consumer Financial Protection Agency Will Prevent Abusive Practices Allowed by the Current System How the CFPA will eliminate these abuses:
Design clear and simple mortgage disclosures so that borrowers can know exactly what loans they are getting
Prohibit brokers and lenders from making loans they know a borrower cannot afford over the long term once higher rates kick in
Example of real abuses in the current system:
Brokers promising low monthly payments but signing a borrower up for expensive unaffordable loans
Consumer Financial Protection Agency Will Prevent Abusive Practices Allowed by the Current System Example of real abuses in the current system:
Brokers pressuring borrowers into late night closings & withholding closing documents
Signing someone up for an expensive overdraft program without his or her consent
Payday lenders taking advantage of borrowers, charging interest up to four times the principal amount
How the CFPA will eliminate these abuses:
Restrict coercive sales tactics
Give consumers a real choice as to whether or not to join costly overdraft programs
Create clear disclosures on the costs of payday loans and stop abusive practices
1 2 3 4 Financial Reform Will Increase Investor Protection & Safeguard Retirement Security, Savings & Investment Key Investor Protection Reforms Rationale Raise the standards for brokers and investment professionals
Investment professionals will act in the interests of investors
Require disclosure of costs and risk factors prior to selling a product
Investors will have information before making purchasing decisions
Create a permanent Investor Advisory Council to the SEC
Government will know the needs and interests of real investors
Increase protections for those who uncover financial frauds
Individuals will be encouraged to report abuse
The Financial Reform Proposals Directly Address the Causes of the Crisis Reform will Protect Consumers, Investors & Taxpayers Causes Key Financial Reform Proposals Insufficient supervision of financial firms Financial Services Oversight Council to oversee whole system One supervisor with final responsibility for all of the largest and most interconnected financial firms Stronger regulation of derivatives, securitization practices, and credit rating agencies Poor oversight of important markets 12
The Financial Reform Proposals Directly Address the Causes of the Crisis Reform will Protect Consumers, Investors & Taxpayers Causes Key Financial Reform Proposals No mechanism for winding down a failed financial firm Explicit resolution authority for all institutions that could threaten the financial system; taxpayers get their money back in the future Energetic international coordination to achieve stronger requirements across the board Uncoordinated international standards 13
New Consumer Protections Karen Cappuccio, Hellertown, PA Karen Cappuccio (age 31) is a Transportation Security Association supervisor at Lehigh Valley Airport. When she refinanced in November 2006, the broker promised her a low fixed rate loan but instead gave her two more expensive loans-a large adjustable rate first loan and a second smaller loan. Her lender altered her asset and income information. These techniques were often used by brokers to qualify borrowers for higher loan amounts than they could otherwise qualify for.
The broker subjected her to a late-night closing and did not give her the closing documents at the time of closing. She sued and won a jury verdict for violations of Pennsylvania's Unfair Trade Practices Act.
The CFPA would have the mandate to design clear and simple mortgage disclosures so that borrowers can know exactly what loans they are getting. The CFPA could also restrict coercive sales tactics. Clear Rules of the Road 15
New Consumer Protections Susan Chapman, Staten Island, NY Susan Chapman (age 52) had an excellent payment history until she was contacted by a mortgage broker who promised to lower her monthly payments by $400 by refinancing. Though she explicitly told him that she did not want an interest-only loan, she nonetheless received an Option ARM that has raised her principal balance by $20,000.
The CFPA would have the mandate to require mortgage disclosures that are clear and simple and highlight key risks so people have the information they need to make sound financial decisions. The Agency could also require mortgage brokers take reasonable care with the advice they give and the loans they offer and for the lender make sure the borrower can afford the higher Option ARM payments when the loan starts paying down the increased principal balance. Clear Rules of the Road 16
New Consumer Protections Maxine Given, Baltimore, MD Maxine Given (age 44) was charged $148 in overdraft fees in April 2008. Most of the fees resulted from her bank's reordering of her withdrawals that took place on the same day from largest to smallest (instead of chronological order). The overdraft was caused by a mortgage check that the bank rejected the very next day. This caused a cascade of $37 overdraft fees on three purchases from the same day, including a $37 fee based on $12.08 debit charge for lunch. She even tried to transfer money from savings, but the transfer was counted too late.
The CFPA would be able to give consumers a real choice as to whether to join expensive overdraft programs. Clear Rules of the Road 17
New Consumer Protections Patricia Nelson, Waukesha, WI Patricia Nelson (age 64) is a retired nursing home aid. Her only income is a $783 monthly disability check. In December 2007, because she had developed health problems, she borrowed $550 from payday lenders to pay to move closer to her daughters. She could barely afford the monthly interest payments and rolled the loans over 22 times. She had paid over $2,700 in interest and not one penny towards the principal when a "good Samaritan" paid off the loans.
The CFPA would be able to design clear disclosures of the costs of payday loans and stop abusive payday practices. Clear Rules of the Road 18
19 Financial Reform What does Financial Reform Mean to Me?
Financial Reform will protect American consumers from abuse and predatory practices and it will set clear rules of the road for the financial industry that will help prevent another financial collapse that costs millions of jobs and the life savings of millions of Americans.
It’s about restoring responsibility and accountability to our financial system and providing Americans with the confidence that there is a system in a place that works for and protects them – not just big banks, hedge funds and their lobbyists.
20 Financial Reform How Does Financial Reform Work?
We’ll consolidate responsibility for protecting consumers from 7 federal agencies to one new Consumer Financial Protection Agency whose sole job will be protecting the American consumer from fraud and abuse and ensuring that people get the clear information they need about loans and other financial products from credit card companies, mortgage brokers and others.
21 Financial Reform How Does Financial Reform Work?
We’ll close loopholes in regulations and require tough new rules and greater transparency from investment advisors, financial brokers and hedge funds – holding them accountable while protecting investors and businesses.
We’ll strengthen oversight and aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits the special interests at the expense of American families and business.
To make sure that no financial institution is ever capable of bringing down the economy, we’ll put in place tough new capital requirements, rigorous standards and supervision that protects the economy and American consumers, investors and businesses.