WASHINGTON — The most tangible government reform to grow out of the Great Recession officially goes live this week when the Consumer Financial Protection Bureau assumes its regulatory authority on Thursday.
Created by the sweeping Dodd-Frank financial overhaul bill last summer, the bureau will serve as America's "beat cop" against deceptive, abusive and predatory loan products in the financial marketplace.
"This agency was created one year ago to stand up for consumers, and we are ready to get to work," said Elizabeth Warren, the assistant to the president who championed the agency's creation and has led efforts to set it up.
The bureau marks a significant triumph for consumer advocates who've waged a largely uphill battle trying to get the financial industry to adopt even modest reforms to help protect consumers. Many say the fight just got a little easier.
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Much as the Environmental Protection Agency consolidated federal efforts against air, water and land pollution in the 1970s, the new consumer bureau will enforce nearly 20 federal consumer finance laws previously handled by seven agencies.
That splintered enforcement left regulators slow to respond as dangerous loan products entered the marketplace, helping to precipitate the nation's housing collapse in 2008.
The new bureau, while a division of the Federal Reserve, will work as a standalone agency to make sure customers know the terms of loan products by cutting the fine print, simplifying forms and helping to illuminate costly penalties and fees that often are hidden.
Safer credit cards, student loans and mortgages — with the risks and costs clearly delineated — will allow consumers to make more educated choices and comparison shop for the best deals. The bureau already is working to condense two federal mortgage disclosure forms into one.
The agency was Warren's dream. Many hoped she'd become its first director. But after Warren drew strong opposition from congressional Republicans and finance lobbyists, President Barack Obama on Monday nominated former Ohio Attorney General Richard Cordray to head the bureau. Warren previously had selected Cordray to help her run the agency.
Some 44 Senate Republicans signed a letter in May vowing to block any nominee for director unless the agency's structure is revamped. If they hold firm, that's enough to block Cordray's Senate confirmation. And under the Dodd-Frank law, many of the agency's powers cannot be executed until a director is confirmed — so the GOP stand threatens to cripple the new consumer champion at birth.
On Monday, Senate Minority Leader Mitch McConnell, R-Ky., said the bureau "represents a government-driven solution to a problem government helped create."
Republicans want the bureau's funding to go through the congressional budget process, unlike other banking regulators. Doing so would allow the banking industry to pressure Congress to cut the bureau's funding.
The new agency also will be the only federal banking regulator with a capped budget.
"It's a recipe for a do-nothing agency," said Travis Plunkett, legislative director for the Consumer Federation of America, referring to Republican proposals to govern the bureau by a multi-member commission rather than a single director, and to make it easier to veto its rules.
Until the Senate confirms a director, the agency won't be able to oversee non-depository institutions such as mortgage companies, payday lenders and credit bureaus — all new powers granted under the Dodd-Frank law. But it will have authority to examine and oversee large banks, since that power was transferred from existing regulators.
The agency has already hired about 500 people, and more than 1,200 are expected to be on board by the end of 2012 at the bureau's Washington, Chicago, New York and San Francisco offices.
The agency, funded mainly through the Federal Reserve, expects to spend $143 million this fiscal year and $329 million in fiscal 2012. More than half the resources will go toward the supervision, enforcement and fair lending division, which will police financial institutions.
Other areas of focus will be consumer financial education, fielding consumer complaints, financial research, and drafting guidance and rules for the financial industry.
The bureau will supervise more than twice as many financial entities as all other federal bank supervisors combined.
If a bureau action is perceived to threaten the safety and soundness of the financial system, a new supervisory panel, the Financial Stability Oversight Council, can veto agency rules with a two-thirds vote. The oversight council includes the heads of nine federal regulatory agencies, with Treasury Secretary Tim Geithner serving as chairman.
Even with the regulatory constraints, consumer advocates are heartened.
Susan Weinstock of Pew Charitable Trusts hopes the bureau will push banks to provide a disclosure box on checking account promotional materials so customers can get the most important information quickly, clearly and in one location. She said the median length for checking account disclosures is now about 111 pages.
Weinstock, director of Pew’s Safe Checking in the Electronic Age project, wants every bank website to post a disclosure box with information on monthly fees, interest rates, minimum deposit amounts and other pertinent information that isn’t easily obtained. Agency representatives were impressed with the proposal in two separate meetings, Weinstock said.
"They liked it," she added. "They thought it made a lot of sense."
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