Your Money Matters by Thomas Sottile, Esq.
Consumers Have New Financial Watchdog With Launch Of CFPB
Last month the ribbon was cut at a new federal agency which began operation in the Nation’s capital on July 21. The Consumer Financial Protection Bureau (CFPB), an independent department within the Federal Reserve System, was authorized by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a federal statute which was signed into law by the President a year ago.
The creation of the CFPB largely was in response to what the National Bureau of Economic Research, a nonprofit private organization, calls the Global Financial Crisis of the late- 2000s, which some economists compare with the Great Depression of the 1930s. The Great Recession is another term heard often in describing our recent fiscal past; and whether we are through it or still struggling with it is the subject of vigorous debate.
The latest economic debacle is said to have begun in December 2007. It hit full-throttle in September 2008 when the huge investment banks Merrill Lynch and Lehman Brothers filed for bankruptcy protection; the latter is considered to be the largest bankruptcy in U.S. history. Thereafter, in a two-day period, $150 billion dollars were withdrawn from U.S. money market funds. This caused a credit freeze because banks were fearful of lending money to other financial institutions due to the risk of default and failure. The free world economies were imperiled; and the global financial system was taken to the precipice of collapse.
The next month brought the bailout of U.S. financial institutions with the enactment of the Emergency Economic Stabilization Act of 2008. The Act provided more than $700 billion dollars to tottering lending establishments. A confluence of economic circumstances is said to have caused the crisis, not the least of which was a sharp increase in food and fuel prices; trailed by a decline in housing prices with an elevation of interest rates. Adjustable rate mortgages adjusted upwards forcing home buyers facing balloon payments into foreclosure. Many of these loans were considered subprime which meant that the risk of default by the borrower was high to begin with.
However, tens of thousands of these mortgages in the preceding few years had been sold to Wall Street investment firms such as Bear Stearns. The mortgage debt was pooled, a practice known as securitization, and financial instruments similar to bonds, called mortgage-backed securities, were created and funded by the cash flow coming from mortgage payments. These securities were sold to banks, hedge funds, insurance companies, pension funds, mutual funds and government agencies.
In March 2008, Bear Stearns collapsed mainly because of the billions of dollars it had invested in these securities whose values plummeted as the mortgage default rate galloped unabated. The demise of the company was a prelude to the risk-management disintegration of the Wall Street investment bank industry; the global financial crisis and the commercial downturn still haunt us today. Our recession is blamed for a decline in economic activity; a loss of consumer confidence and wealth in the trillions of dollars; high unemployment; and a housing market suffering from numerous evictions, foreclosures and prolonged vacancies.
While many causes for the financial crisis have been suggested by the economics experts, the U.S. Senate Permanent Subcommittee on Investigations issued a 650-page report earlier this year, which stated that: “[T]he crisis was not a natural disaster but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
The Consumer Financial Protection Bureau (www.consumerfinance.gov) is the new cop on the Wall Street beat whose mission is to supervise banks, credit unions and financial companies in order to ensure transparency and accountability, and enforce federal consumer financial laws. It seems clear that this is an intended solution for preventing another monetary catastrophe: To have bank examiners, forensics accountants and prosecutors ride along the side of the speeding train, which the capital markets have become, to prevent it from going off the rails. Or else at least to make them put the brakes on around the curves. There are some promised direct benefits for the average financial customer as well.
CFPB has a mechanism on its website in place for consumers to report financial scams and rip-offs, and to ensure that there is full disclosure from lending credit institutions in financial transactions. Sometimes the true cost and inherent down-side risks of fiscal products, such as Adjustable Rate Mortgages (ARMs), are lost on novice mortgagors. The agency also is tasked with identifying and stopping deceptive and abusive financial practices and to maintain up to date rules governing monetary service products. Credit card complaints may be reported through its telephone hotline at 1-855-411-2372 (CFPB). The CFPB also offers assistance if individuals or families are behind in their mortgages; and for later this year it promises services in the areas of credit reporting and debt collection.
The one thing which is certain is that when financial dealings increase in complexity, the way they always do, pitfalls are created which did not exist in an earlier and less complicated time. If CFPB fulfills its mandate, consumers will have another resource which is just a telephone call or mouse-click away to help explain the often obtuse and sometimes disingenuous problems of monetary transactions.
*
Thomas Sottile is an attorney in Media, PA. He retired from the U.S. Postal Inspection Service after 23 years as an investigator and attorney.
Consumers Have New Financial Watchdog With Launch Of CFPB
Last month the ribbon was cut at a new federal agency which began operation in the Nation’s capital on July 21. The Consumer Financial Protection Bureau (CFPB), an independent department within the Federal Reserve System, was authorized by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a federal statute which was signed into law by the President a year ago.
The creation of the CFPB largely was in response to what the National Bureau of Economic Research, a nonprofit private organization, calls the Global Financial Crisis of the late- 2000s, which some economists compare with the Great Depression of the 1930s. The Great Recession is another term heard often in describing our recent fiscal past; and whether we are through it or still struggling with it is the subject of vigorous debate.
The latest economic debacle is said to have begun in December 2007. It hit full-throttle in September 2008 when the huge investment banks Merrill Lynch and Lehman Brothers filed for bankruptcy protection; the latter is considered to be the largest bankruptcy in U.S. history. Thereafter, in a two-day period, $150 billion dollars were withdrawn from U.S. money market funds. This caused a credit freeze because banks were fearful of lending money to other financial institutions due to the risk of default and failure. The free world economies were imperiled; and the global financial system was taken to the precipice of collapse.
The next month brought the bailout of U.S. financial institutions with the enactment of the Emergency Economic Stabilization Act of 2008. The Act provided more than $700 billion dollars to tottering lending establishments. A confluence of economic circumstances is said to have caused the crisis, not the least of which was a sharp increase in food and fuel prices; trailed by a decline in housing prices with an elevation of interest rates. Adjustable rate mortgages adjusted upwards forcing home buyers facing balloon payments into foreclosure. Many of these loans were considered subprime which meant that the risk of default by the borrower was high to begin with.
However, tens of thousands of these mortgages in the preceding few years had been sold to Wall Street investment firms such as Bear Stearns. The mortgage debt was pooled, a practice known as securitization, and financial instruments similar to bonds, called mortgage-backed securities, were created and funded by the cash flow coming from mortgage payments. These securities were sold to banks, hedge funds, insurance companies, pension funds, mutual funds and government agencies.
In March 2008, Bear Stearns collapsed mainly because of the billions of dollars it had invested in these securities whose values plummeted as the mortgage default rate galloped unabated. The demise of the company was a prelude to the risk-management disintegration of the Wall Street investment bank industry; the global financial crisis and the commercial downturn still haunt us today. Our recession is blamed for a decline in economic activity; a loss of consumer confidence and wealth in the trillions of dollars; high unemployment; and a housing market suffering from numerous evictions, foreclosures and prolonged vacancies.
While many causes for the financial crisis have been suggested by the economics experts, the U.S. Senate Permanent Subcommittee on Investigations issued a 650-page report earlier this year, which stated that: “[T]he crisis was not a natural disaster but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
The Consumer Financial Protection Bureau (www.consumerfinance.gov) is the new cop on the Wall Street beat whose mission is to supervise banks, credit unions and financial companies in order to ensure transparency and accountability, and enforce federal consumer financial laws. It seems clear that this is an intended solution for preventing another monetary catastrophe: To have bank examiners, forensics accountants and prosecutors ride along the side of the speeding train, which the capital markets have become, to prevent it from going off the rails. Or else at least to make them put the brakes on around the curves. There are some promised direct benefits for the average financial customer as well.
CFPB has a mechanism on its website in place for consumers to report financial scams and rip-offs, and to ensure that there is full disclosure from lending credit institutions in financial transactions. Sometimes the true cost and inherent down-side risks of fiscal products, such as Adjustable Rate Mortgages (ARMs), are lost on novice mortgagors. The agency also is tasked with identifying and stopping deceptive and abusive financial practices and to maintain up to date rules governing monetary service products. Credit card complaints may be reported through its telephone hotline at 1-855-411-2372 (CFPB). The CFPB also offers assistance if individuals or families are behind in their mortgages; and for later this year it promises services in the areas of credit reporting and debt collection.
The one thing which is certain is that when financial dealings increase in complexity, the way they always do, pitfalls are created which did not exist in an earlier and less complicated time. If CFPB fulfills its mandate, consumers will have another resource which is just a telephone call or mouse-click away to help explain the often obtuse and sometimes disingenuous problems of monetary transactions.
*
Thomas Sottile is an attorney in Media, PA. He retired from the U.S. Postal Inspection Service after 23 years as an investigator and attorney.
