Congress wary of ‘plain vanilla’ bank proposal
WASHINGTON — Congress is expected to reject President Barack Obama’s proposed mandate that banks offer customers “plain vanilla” financial products, such as a 30-year fixed mortgage.
The defeat would be a victory for the industry, which contends that such a proposal would give the government an unprecedented role in the marketplace.
Exotic financial products, particularly subprime mortgages, were considered a major factor in last year’s financial crisis. Loans with low introductory rates that suddenly ballooned in size prompted defaults by cash-strapped homeowners.
Under Obama’s plan, a new government agency would be established to monitor the fine print on such products as mortgages and credit cards. The Consumer Financial Protection Agency would require that lenders be up front about the cost of their products and offer customers a standard low-risk alternative.
Rep. Barney Frank, chairman of the House Financial Services Committee, is preparing legislation that would endorse the concept of the consumer agency. But Frank’s version would not require financial firms to offer standardized products, said Steve Adamske, a spokesman for the Massachusetts Democrat.
The proposal also was expected to fall flat in the Senate, where conservative Democrats and Republicans say they are concerned it would give the government too much control in the marketplace and would limit innovation.
“Implied in this belief is the notion that some people, such as the government bureaucrats, can make informed decisions about the value of products and services while others, such as the American consumer, cannot,” said Sen. Richard Shelby, the top Republican on the Senate Banking Committee.
Kirstin Brost, a spokeswoman for Sen. Christopher Dodd, said the Banking Committee chairman “has a hard time seeing how plain vanilla would work” but he is still working with his colleagues to draft the legislation.
The idea was promoted by Michael Barr, an assistant Treasury secretary for financial institutions, who says forcing banks to disclose more details about their loans wouldn’t go far enough to protect consumers.
“It is time for a level playing field for financial services competition based on strong rules, not based on exploiting consumer confusion,” Barr told the Senate Banking Committee in July.
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