With Congress looming, lenders cut sweet deals

The Treasury Department asked Capitol Hill Tuesday to overhaul regulation of the credit industry, saying the current system is 'designed to fail.'

By , Staff writer

The Obama administration continued its efforts Tuesday to further regulate the financial world, pushing to create an agency to protect consumers from predatory lenders and overzealous debt collectors.

The current regulation of the credit card industry has led to fraud, deceptive practices, and unscrupulous loan products, Treasury Assistant Secretary Michael Barr told a congressional panel Tuesday. A new regulatory system is needed to prevent another credit crash in the future, he added.

Sen. Bob Corker (R) of Tennessee dismissed the proposed Consumer Financial Protection Agency (CFPA) as “a tremendous overreach” that would limit what products companies could offer and what consumers could buy.

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The hearing came even as banks and debt collectors are moving swiftly to keep the loan industry afloat, making deals with consumers facing defaults. Banks and debt collectors are rewriting credit card contracts and lowering minimum payments on past-due loans to almost zero.

“We’re finding a new reality, a new equilibrium, that matches today’s economic circumstances,” says Robert Markoff, president of the National Association of Retail Collection Attorneys (NARCA).

But such efforts have not held off the administration’s attempts to overhaul consumer protection agencies.

If passed, the CFPA would fold the jurisdictions of 10 different government agencies into one single agency, which would deal with mortgages, credit cards, payday loans, and other products. The CFPA would have broad authority to ban practices in the financial industry and force companies to offer so-called “plain vanilla” products that would carry less risk.

"The present system of consumer protection regulation is not designed to be independent or accountable, effective or balanced. It is designed to fail," Mr. Barr told the Senate Banking Committee. "We have to have a fresh start with a new agency whose sole mission is standing up for the American people."

The regulatory proposal comes as the percentage of credit card charge-offs – where banks write off loans and sell them to debt-collection agencies – rose by 60 percent since last year, a 20-year high, according to Moody's.

A survey of 1,000 Americans undertaken by NARCA and obtained by The Monitor ahead of its release, shows that 77 percent of consumers say credit has become more restrictive in the last year. Thirty-two percent say they’re more likely to be the target of a debt-collection agency. At the same time, 61 percent said people should try to pay back their loans without asking for modifications.

Mr. Markoff says many Americans “went into a shell” this year, letting loan statements – especially home equity products – lapse as they experienced or feared layoffs. But during the last two months, more people are expressing an interest in paying off loans and protecting their credit scores, he says.

They’re getting some help from financial services companies.

This year, Bank of America expects to recast the terms of 1.2 million credit-card contracts, up 20 percent from 2008. Mandatory minimum payments from retail lenders have mostly disappeared, allowing debt collectors to take even small monthly sums in order to keep debtors paying and revenue flowing.

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