Schumer, Durbin Propose New Consumer Watchdog Agency (Update2)

March 10 (Bloomberg) -- Senators Richard Durbin of Illinois and Charles Schumer of New York introduced a measure to create a financial oversight agency to help consumers obtain financial products without “hidden dangers or unreasonable tricks.”

The Financial Product Safety Commission proposed by the two Democrats would help consumers obtain products such as mortgages, credit cards and retirement savings accounts. It is modeled after the Consumer Product Safety Commission that regulates goods ranging from toys to all-terrain vehicles.

“It’s time to put the needs of American families above the interests of Wall Street,” Durbin said at a news conference in Washington today. “When American consumers decide to sign up for mortgages, with a mountain of fine print, many times they don’t have a clue what’s included inside. And it can be explosive not just for the borrower but for America’s economy.”

The agency would act quickly on “predatory practices,” Durbin said, while “ensuring that companies are held accountable when they abuse, deceive or take advantage of the consumer they claim to be helping.” Lawmakers will consider the proposal as part of a larger effort to overhaul financial rules in response to the flagging economy, Durbin said.

Critics of current regulation such as Elizabeth Warren, a Harvard law school professor and member of the panel overseeing Congress’s $700 billion bailout of the financial industry, and the Consumer Federation of America say federal agencies sometimes overlook new products that are harmful to consumers because they’re focused on the safety and soundness of individual companies.

Regulatory Gap

A new agency would fill the regulatory gap, Warren said. Regulations in the past 30 years have “moved consistently in one direction -- against the family,” Warren said at the news conference. A Financial Products Safety Commission would “give families a fighting chance against any lenders that make their profits by tricks and traps,” she said.

Earlier today, Federal Reserve Chairman Ben S. Bernanke urged a sweeping overhaul of U.S. financial regulations to smooth out financial markets’ boom-and-bust cycles. Last week, the Senate Banking Committee began a series of hearings on financial rules.

Labor, Consumer Support

The financial-product safety legislation is also supported by Representative William Delahunt, a Massachusetts Democrat, and Representative Brad Miller, a North Carolina Democrat. More than 55 consumer groups and labor unions support the bill, including the AFL-CIO, the Consumer Federation of America and the NAACP, the sponsors said.

The new agency would be able to investigate predatory or deceptive practices, according to a statement from Durbin. It would coordinate enforcement with other federal and state regulators. It also would report regularly to the public on the safety of financial products and policy recommendations, according to the statement.

The situation with some financial products is similar to the drug market of the early 1900s, Schumer said. The government responded by regulating “quack” medicine, he said.

“Those who sell quack financial products in the 21st century” should be “reined in, not with disclosure, but with real limits,” Schumer said.

‘Hidden Dangers’

Existing financial regulators, including the Federal Reserve, haven’t been focused on consumers, leaving them vulnerable to “hidden dangers and unreasonable tricks,” Schumer said.

“Only when we have an agency with consumer protection as its sole mission can we be confident that the warped incentives and conflicts of interest are not watering down the protections we have rightfully come to expect from government oversight,” Schumer said.

It’s appropriate for banking regulators to look at both safety and soundness and consumer protection because they’re not separate issues, said Floyd Stoner, executive vice president at the American Bankers Association in Washington.

“Good underwriting standards focusing on an ability to repay a loan is something bank regulators were looking at and that banks should follow,” Stoner said. “We want good underwriting, we want clarity and we want to work with Congress” as lawmakers rewrite financial rules, he said.

To contact the reporter on this story: Jeff Plungis in Washington at jplungis@bloomberg.net.

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net.