November 14, 2008
to Enact Reforms To Address Causes of Current Financial Crisis
WASHINGTON, D.C. – Consumers Union, the nonprofit publisher of Consumer Reports, urged Congress and President-Elect Barack Obama today to enact regulatory reforms to address the causes of the current financial crisis and to ensure that taxpayers and consumers are protected from its deepening impact.
“The $700 billion Wall Street rescue plan provided the financial industry with much needed capital, but it does nothing to address the root causes of the current crisis,” said Pam Banks, Policy Counsel for Consumers Union. “Today’s financial mess is the result of bad business decisions on Wall Street and the failure of our regulatory system to rein in bad lending practices and protect consumers. Congress and the new administration must work to stem the current tide of foreclosures and enact reforms in the mortgage and credit markets to reduce the likelihood that this ever happens again.”
Banks added: “The Treasury Department now says it’s going to shift the focus of the plan to consumer credit, instead of buying troubled loans from financial institutions. The desire to unfreeze credit is understandable, but that shouldn’t come at the expense of consumers facing foreclosure. We’re also troubled by the fact that the plan requires the President to nominate an inspector general, and Congress has to appoint an oversight panel, but six weeks after the plan was approved, most of the watchdog positions are still unfilled.”
Consumers Union identified the following key priorities for the Obama Administration and the incoming Congress to address the causes and impacts of the current financial crisis:
Enact comprehensive mortgage reform: Reforms are needed to prevent the lending practices that misled consumers about the true cost of loans and ultimately triggered the foreclosure crisis and the subsequent collapse on Wall Street. Those who arrange or make loans should have a fiduciary duty to put the interests of borrowers first and provide only suitable financial products. It should be illegal to offer a loan to someone with no demonstrated ability to repay it at its peak interest rate or to pay loan brokers extra money to make higher priced loans. Congress should end practices such as abusive prepayment penalties and yield spread premiums. Loan pricing must be simplified so that borrowers can understand the true cost of a mortgage. If something goes wrong with a loan, everyone who got a fee or holds a share of it should be accountable.
Reduce foreclosures: Foreclosures hurt families who lose their homes and all homeowners by driving down housing values. Lenders are benefiting from a multi-billion rescue; federal officials should require them to systematically modify loans for homeowners at risk of foreclosure. Instead of kicking people out of their homes, the aim should be to keep them there and help strengthen surrounding neighborhoods already hit by foreclosures. There should be a 6-9 month moratorium on foreclosures to allow adequate time for homeowners to secure effective loan modifications. Finally, Congress should allow court-supervised restructuring of mortgages to help consumers keep their homes.
Curb abusive credit card practices: Many financial institutions that will benefit from the federal rescue are the same ones that have engaged in abusive credit card lending practices. The Federal Reserve Board is expected to issue rules by the end of 2008 that should rein in some of the most abusive lending practices that can unfairly trap American families in credit card debt. Congress should make sure consumers get all the protections they need so we can avoid even more financial chaos.
Protect consumers through effective oversight: Consumers need effective regulation of financial services products, including the establishment of an independent commission to oversee the safety of financial products. Financial industry regulators must place an equal priority on consumer protection as they do on the safety and soundness of the financial institutions they regulate. The new Administration must put a stop to “wait and see” conduct by federal regulatory agencies. Congress and federal banking agencies must also restore the ability of states to develop and enforce consumer protection standards in financial services. Moreover, efforts to engage in global coordination in financial services must result in the selection of the highest consumer protection standards, not the weakest ones.
Protect retirement: Americans need a retirement structure that ensures a well funded public Social Security system, private sector pensions, and consumer protections for individual retirement savings. Congress should not privatize Social Security but work to ensure that the system remains public and solvent. Congress should ensure that the Pension Benefit Guaranty Corporation is well managed and well capitalized. Consumers deserve more complete and accurate information about the risks associated with investment products. In addition, a comprehensive, pro-investor reform package must provide accountability standards for those who advise and manage retirement investments.
Protect taxpayers: Taxpayers should not have to pay for lobbying fees or excessive salaries or bonuses for executives of companies that need financial help from the government because they engaged in risky and unsafe practices. Every bank or other company who sells bad assets to the government, issues shares to the government, gets a government guarantee, or otherwise benefits directly or indirectly from tax dollars must be held to a high standard of conduct. Congress and the regulators also should require greater transparency of risk management and other business practices for all businesses that benefit from the bailout or from other government support.
Gail Hillebrand: 415-431-6747
Pam Banks: 202-462-6262