The Wall Street Reform that is now pending in Congress is critical to ensuring that the U.S. never again finds itself in the midst of a massive economic collapse that is in large part due to failures of the regulatory system. President Obama strongly supports this legislation because it contains four key components. First, it takes steps to put an end to taxpayer bailouts. Second, it brings new transparency to complex financial markets. Third, it gives shareholders more power in the financial system.
Fourth, the reform creates a consumer financial protection agency that would look out for the interests of everyday Americans and stop the most abusive practices associated with mortgages, credit cards and access to financial services. This is particularly important to minority communities that are often victims of predatory lending, costly payday loans and excessive fees from financial institutions.
As an example, during the housing boom of the previous decade, African Americans saw rapid growth in homeownership as the percentage of home owners grew from 42 percent in 1995 to 50 percent in 2004. However, there was a problem. Many of these homes were purchased using exotic, high-priced predatory loans with low teaser interest rates. Recent reports show that African Americans and other minorities were three times more likely to receive higher-priced loans when purchasing a home. Even when refinancing, African Americans were twice as likely to receive these exotic home mortgages.
These loans were the equivalent of ticking time bombs in African American communities as once the loans re-set, usually with a higher monthly interest payment, many consumers found themselves with a mortgage they could no longer afford. At the end of 2009, over 40% of subprime mortgages were at risk of foreclosure, partially due to unscrupulous and irresponsible lending practices. The overall impact of tight credit and high foreclosure rates have led to a drop in homeownership rates for African Americans to 46 percent in 2009.
How would the consumer financial protection agency have prevented the abuses in the marketplace that led to these unfortunate foreclosures? First, the President is calling for fair and transparent financial services that are easy for everyday consumers to understand. Anyone who has ever purchased a home or taken the time to read the fine print in their credit card statement appreciates how tough it can be to navigate the most basic financial matters. Further, by promoting and supporting financial literacy for all, this agency will empower consumers with clear and concise information when they are making financial decisions. This will help ensure that all Americans, especially those new to financial markets, understand the basic principles of personal finance which are essential to true financial independence.
In addition, for the first time the federal government will be able to oversee alternative financial services, such as payday lenders and cash checking outlets where minorities make up nearly 40 percent of the customers. These businesses play an important role in the market and should be accessible when needed. However, consumers also need to understand clearly the terms on which they are borrowing and have the protections afforded those that borrow from more traditional financial institutions. The new agency will also monitor credit card companies and banks to protect us from excessive fees and overdraft charges. Critically, the consumer financial protection agency is designed to enforce fair lending and end discriminatory practices against African Americans and other minorities.
President Obama has put the nation on a path to reforming our financial system by calling for the strongest consumer protections ever, bringing opaque markets out of the shadows, giving shareholders a stronger voice, and ending taxpayer bailouts once and for all. The President understands the value of a free market, but that doesn’t mean having free license to take whatever you can get however you can get it, particularly from those in our most vulnerable communities.
Cecilia Rouse is a Member of the Council of Economic Advisers