The Obama administration last night detailed a series of proposals that would involve the government much more deeply in the private markets, from helping to steer consumers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to prevent the kinds of risk-taking that sparked the economic crisis.
The plan is an attempt to overhaul an outdated system of financial regulations, according to senior administration officials.
It would vastly increase the powers of the Federal Reserve in an effort to create stronger and more consistent oversight of the largest companies and most important markets.
It also would create a new agency to protect consumers of mortgages, credit cards and other financial products.
President Obama is expected to formally unveil the proposal today. The administration also plans to release an 85-page white paper detailing the plans and justifying each element as a direct response to the causes of the financial crisis.
Many of the specific proposals will require legislation, and today's announcement will drop the plan into an already heated debate on Capitol Hill about the eventual shape of reform. The financial crisis has forced broad consensus that changes are necessary, but there are wide disagreements about the details.
The proposed Consumer Financial Protection Agency would have broad authority to regulate the relationship between financial companies and consumers of mortgage loans, credit cards, checking accounts and other financial products. It would define standards, police compliance and penalize delinquent firms. Other agencies, particularly the Federal Reserve, would surrender some powers.
One idea highlighted by the administration is to require that lenders offer all customers standard "plain vanilla" loans with simple features and streamlined pricing, such as 30-year, fixed-rate mortgages. The sale of more loans with more complicated terms would be subjected to greater scrutiny by the agency. It could even require that customers make a written choice to select anything other than a vanilla loan.
The agency would have authority to overhaul a tangled mess of federal regulations that many financial experts regard as outdated, insufficient and inadequately enforced. An oft-cited example is the massive stack of paperwork handed to mortgage borrowers at closing, including several calculations of the true cost of the loan itself.
"Consumers should have clear disclosure regarding the consequences of their financial decisions," the plan states.
The agency also would have the power to limit or prohibit fees and other practices judged generally harmful to consumers. One example cited are prepayment penalties, or fees designed to discourage people from refinancing before their interest rate increases.
And the agency would have a mandate to increase the availability of financial products in lower-income and underserved communities, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.
To carry out these responsibilities, the agency could conduct inspections of firms, putting it on equal footing with regulators charged with ensuring the health of these companies.
The administration also wants to increase the powers of the Federal Reserve. The agency would gain new authority over the largest financial firms, including commercial banks such as J.P. Morgan Chase, investment banks such as Goldman Sachs and insurance companies such as MetLife. It would require those firms to hold greater capital reserves against potential losses, and constrain their ability to make high-risk investments.
The proposal is strongly favored by many of the largest banks, which already are subject to heavy regulation and want the government to impose similar constraints on the operations of their rivals.
The administration also will propose a new authority to dismantle these massive firms if they fall into trouble, through a process akin to bankruptcy.
And it will try to impose new oversight on financial markets for the sale of derivatives and asset-backed securities, investments made from mortgages and other loans.
Several ideas have been dropped as the administration picks its battles. The proposal will not include a new federal regulatory structure for insurance companies, which are regulated at the state level, according to people familiar with the matter. The industry is deeply divided, and the White House anticipated a distracting fight. The administration instead plans to create an office inside the Treasury Department to monitor the insurance industry, the sources said.
Some of the largest insurance companies could still fall under the scrutiny of the Federal Reserve in its new role as a systemic risk regulator.
The administration earlier had backed away from a proposal to merge the two agencies that oversee the markets, and to merge the four agencies that regulate banks. It still will seek to merge the Office of Thrift Supervision and the Office of the Comptroller of the Currency to create a single agency to oversee banks with national charters. And it will propose to eliminate a special charter for firms that specialize in mortgage lending, sources said.
The creation of a new consumer protection agency is perhaps the most radical proposal remaining.
It is likely to spark a massive fight on Capitol Hill. The regulatory agencies and industry groups acknowledge failures in recent years, but they say the existing model remains the best way to protect consumers. They argue that the agencies can identify problems more easily because of their close engagement with firms. They also are concerned that a consumer agency could be overly restrictive, limiting access to loans and constraining financial innovation.
"This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves," said Kelly King, chief executive of BB&T, a large commercial bank based in North Carolina.
"We've tried it the other way for years, and obviously it didn't work. That's how we got here," said John Taylor of the National Community Reinvestment Coalition. "They've really demonstrated that they had very little interest."
Taylor also played down the recent rush of public comments from regulators who said they had a renewed commitment to consumer protection.
"They're so late that it's absurd," Taylor said. "The horse has left the barn, the hay has rotted, the roof is falling in."
Steve Adamske, spokesman for the House Financial Services Committee, said committee chairman Rep. Barney Frank, (D-Mass.), plans to launch hearings on the proposals next week, and to hold votes on pieces of the legislation as soon as July.
"We've been waiting for this for a long time," Adamske said.
The Senate is not expected to begin work on the reforms until fall, but leaders in both houses say they hope to send legislation to the president by year's end.