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No Plain Vanilla Please

September 24, 2009

Banks, credit card providers and mortgage companies will not be required after all to provide “plain vanilla” or no-frills types of loans and credit cards as Congress works its magic on the Obama administration’s plans for financial regulatory reform.

Before the August recess, the Treasury Department blitzed Congress with a series of proposed bills outlining some major changes to the financial regulatory system. Those included the creation of a Consumer Financial Protection Agency, the merger of the Office of Thrift Supervision with the Office of the Comptroller of the Currency, regulation of credit-rating agencies and the over-the-counter derivatives market, and the ability of shareholders to get a “say on pay” on executive compensation.

Now that Congress is back from recess, it’s beginning to deal with the mound of legislation this week. On Wednesday, the House Financial Services Committee heard testimony from Treasury Secretary Timothy Geithner on the Consumer Financial Protection Agency and other matters.

Not surprisingly, some of the more controversial items are beginning to melt away in the face of congressional resistance and intense lobbying by the financial industry. Among the first provisions to fall by the wayside is the one calling for “plain vanilla” financial products.

At the time the CFPA was proposed in June, President Obama said, “This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want and actually understand. … Those ridiculous contracts with pages of fine print that no one can figure out — those things will be a thing of the past.”

Not so fast, said the financial industry. It objected to having the federal government dictate which products it had to sell, so out goes the requirement for “plain vanilla” products such as fixed-rate mortgages and no-frills credit cards. Geithner indicated the administration’s willingness to compromise on the matter, noting, according to the Los Angeles Times, “As the president likes to say, we don’t have a monopoly of wisdom on these things.”

Committee Chairman Barney Frank, D-Mass., had already indicated his opposition to the plain-vanilla provision a few months ago, telling the American Accounting Association it wasn’t likely to show up in the final bill (see Barney Frank: “We Will Never Legislate Accounting").

Another candidate for the chopping block is the Consumer Financial Protection Agency itself. Several existing agencies, such as the FDIC, see the creation of such an agency as an encroachment on their turf and are also arguing against it. The AICPA told Frank’s committee it does not think CPAs should be subject to regulation by the agency, and according to the LA Times, other businesses may be exempted too, including retailers that offer credit or layaway plans, and automobile dealers that provide financing to buy vehicles.

After all, what’s the point of overhauling the financial regulatory system if you’re actually going to regulate it?

Comments (1)
What can one expect from the finest Congress that money can buy.

Perhaps it's time for Credit Unions to provide these products. I for one will immediately advise all my individual, as well as business clients, where possible, to do all their banking at these Credit Unions.

I guess this assertion of free choice makes me one of those Socialists.
Posted by | Friday, September 25 2009 at 3:01PM ET
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