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Business Costs & Regulation

Mortgages Top New Agency's Agenda

The consumer bureau created by the financial regulatory bill will have immense power -- and it won’t be shy about using it.

The Consumer Financial Protection Bureau just created by Congress will quickly become one of the most powerful and most independent agencies in Washington -- and it’s expected to use its clout first to change the rules for buying a home and to enforce new credit card regulations.

The primary housing goal seems to be to exclude or limit mortgages to the plain- vanilla 30-year fixed rate variety. Adjustable loans that reset sooner than five years will be discouraged. “We’ll be sorry when they’re gone,” says Brian Brooks, chair of the financial services practice with the law firm O’Melveny & Myers. “They’ve been used to help first time home buyers in high priced cities. It will become very difficult for new buyers in San Francisco, New York City and Boston.”

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Another aim is to reduce the paperwork for closing on a house sale to two pages. Anyone who’s been through a closing will appreciate that. But it’s no easy task. Some mortgage finance specialists have been working on that goal for 20 years.

Also high on the list of early targets will be enforcement of new credit card requirements that govern setting interest rates, raising rates retroactively and dividing payments among different rates. Consumer groups have been pushing for the Federal Reserve to take action on this front, with little success. They applaud the new consumer bureau.

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Businesses, in turn, recoil at the size of the new agency, which will have a budget of about $500 million and a staff of a couple of thousand or so. Critics are also uneasy about the bureau’s independence. It will get its money from the Federal Reserve and won’t have to run the gauntlet of congressional appropriations committees. Also, the structure has no commission similar to the Securities and Exchange Commission. The director makes the decisions, which can be overturned by a council of regulators, but only if it is determined that a new rule would threaten the health of the financial system, which is a pretty high hurdle.

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Its authority doesn’t reach every group, however. For example, excluded from its rulemaking will be auto dealers and dealers of motorcycles, recreational vehicles and boats. But there’s plenty left. The new law, which also covers derivatives trading and whether a bank is too big to fail, totals some 2,300 pages. Compare that, says the American Bankers Association, which the law that created the Federal Reserve (31 pages) or the Depression-era Glass-Steagall Act (37 pages), which forced banks to choose between taking deposits and making loans or investing and trading.

How aggressive the bureau becomes will depend in large part on its first director, who must win confirmation by the Senate for a five-year term. The choice is hugely important because the new bureau starts with pretty much a blank slate.

Phillip Swagel, a visiting professor at Georgetown University’s McDonough School of Business, says the only public official he can think of who has such unfettered latitude is New York’s state attorney general. Swagel adds that whoever is named is going to establish a fundamental approach that answers the question, “What is the role of the government in protecting consumers from themselves?”

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President Obama hadn’t even signed the new law Wednesday when a behind-the-scenes battle began to emerge. Consumer groups, which got a lot but not all of what they want in creation of the new bureau, are pushing for the White House to nominate Harvard law professor Elizabeth Warren as the first director.

Nominating Warren would trigger fierce opposition. Business groups see her views as too aggressive when it comes to policy by bankers and others who extend credit. So her nomination likely would draw vigorous Republican opposition and a certain Senate filibuster.

The White House might not want to go through that battle, despite a push for Warren from consumer groups and the AFL-CIO. But she may not get that far. As chair of the oversight panel reviewing the bank rescue, she clashed with Treasury Secretary Geithner over decisions that benefited Goldman Sachs, AIG and others. Those experiences could cause the White House to turn to someone else, such as Michael Barr, an assistant Treasury secretary who’s already gone through the confirmation process.

Any strong consumer candidate could run into a filibuster, but that wouldn’t derail the start-up of the bureau. Under the law, Geithner becomes interim director pending confirmation of a director. Whoever is in charge, getting the bureau functioning will take some time. One result will be clear: The era of easy, cheap credit is over.

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