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We propose that federally chartered institutions be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions. This would restore a fairer and more measured approach to the roles of the states with respect to federally chartered institutions. We also propose that states should be able to enforce these laws, as well as regulations of the CFPA, with respect to federally chartered institutions, subject to appropriate arrangements with prudential supervisors. With respect to state banks supervised by a federal prudential regulator, the CFPA will be the primary consumer compliance supervisor at the federal level. Maintaining consistency among fifty states’ supervisory and enforcement efforts will always remain a significant challenge, but the CFPA’s concurrent supervisory and enforcement powers should place it in a position to help. The CFPA should assume responsibility for federal efforts to help the states unify and strengthen standards for registering and improving the quality of providers and intermediaries.Filippo Cardone Info The Coordinating Council should meet at least quarterly to identify gaps in consumer protection across financial products and facilitate coordination of consumer protection efforts. Over the past two years, the financial system has been threatened by the failure or near failure of some of the largest and most interconnected financial firms. Our current system already has strong procedures and expertise for handling the failure of banks, but when a bank holding company or other nonbank financial firm is in severe distress, there are currently only two options: obtain outside capital or file for bankruptcy. During most economic climates, these are suitable options that will not impact greater financial stability. However, in stressed conditions it may prove difficult for distressed institutions to raise sufficient private capital. Thus, if a large, interconnected bank holding company or other nonbank financial firm nears failure during a financial crisis, there are only two untenable options: obtain emergency funding from the US government as in the case of AIG, or file for bankruptcy as in the case of Lehman Brothers. Neither of these options is acceptable for managing the resolution of the firm efficiently and effectively in a manner that limits the systemic risk with the least cost to the taxpayer. We propose a new authority, modeled on the existing authority of the FDIC, that should allow the government to address the potential failure of a bank holding company or other nonbank financial firm when the stability of the financial system is at risk. In order to improve accountability in the use of other crisis tools, we also propose that the Federal Reserve Board receive prior written approval from the Secretary of the Treasury for emergency lending under its “unusual and exigent circumstances” authority.
They should not include prepayment penalties and should be underwritten to fully document income, collect escrow for taxes and insurance, and have predictable payments. These products are also easy to compare because they can be differentiated by a single, simple characteristic, the interest rate. We propose that the government do more to promote “plain vanilla” products. The CFPA should be authorized to define standards for such products and require firms to offer them alongside whatever other lawful products a firm chooses to offer. The Federal Reserve Board issued final regulations last year, which take effect in October, that impose extra protections and higher penalties on “alternative” or “higher cost” loans, that is, mortgages that are not “plain vanilla”. The CFPA should assume responsibility for this regulation. The CFPA should consider whether to add other types of mortgages to the class that receive additional scrutiny and higher penalties, considering the complexity of the mortgage itself, such as negative amortization features, and the performance of the loan type. It should leave in the class that doesn’t have these extra protections only products that meet a plain vanilla test.
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These are a form of consumer credit, and consumers often use them as substitutes for other forms of credit such as payday loans, credit card cash advances, and traditional overdraft lines of credit. However, overdraft protection plans have not been regulated as credit, and, as a result, consumers may not overtly think of the plans as credit. Consumers may not, therefore, take the same care in their use of overdrafts that they take with other, more overt credit products. The CFPA would be authorized by existing statutes to regulate overdraft protection more like a credit product, with Truth in Lending disclosures as appropriate. The CFPA could also prohibit charging for overdraft coverage under a plan unless the consumer has “opted in” to the plan, just as the Credit CARD Act prohibits over-the-limit fees unless the consumer has “opted in” to over-the-limit coverage. It could also require affirmative consent at point of sale with debit transactions or at an ATM machine before collecting an “overdraft fee”.A critical part of the CFPA’s mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access.The CFPA should also have authority to address overly complex financial contracts. For example, the CFPA should be authorized to consider whether mortgage regulations require strengthening. The CFPA could determine that prepayment penalties should be banned for certain types of products, such as subprime or nontraditional mortgages, or for all products, because the penalties make loans too complex for the least sophisticated consumers or those least able to shop effectively. The CFPA could adopt a “life of loan” approach to regulating mortgages that provides a consumer adequate protections through servicing and loss mitigation stages. The CFPA should also be authorized to ban ofteninvisible side payments to mortgage originators – so called yield spread premiums or overages – that are tied to the borrower receiving worse terms than she qualifies for, if the CFPA finds that disclosure is not an adequate remedy.
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