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Back To Basics In Banking

President Obama’s overhaul of the financial regulatory system promises to add a new flavor to consumer financial products: “plain vanilla.”

A requirement that banks and other lenders offer a basic mortgage plan with simple and straightforward terms is part of the administration’s sweeping plan to reform government oversight of financial services in the wake of last year’s credit crisis.

One of the plan’s cornerstones is the creation of a new Consumer Financial Protection Agency. In addition to enforcing requirements for “plain vanilla” products, the agency would be responsible for banning unfair practices and enforcing rules that require companies to be “clear and conspicuous” when explaining the costs and risks of their products to consumers.

Financial companies are not excited by this new opportunity to deal forthrightly and fairly with the public. David Hirschmann, the president and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets, told The Associated Press that the chamber would oppose a new agency “that cannibalizes regulatory expertise, adding yet another regulatory layer.” The Independent Bankers of America issued a press release arguing that the regulations created by the new agency would likely make it too expensive for banks to offer useful new services.

Apparently, banks just can’t make money taking short-term deposits at rates below 1 percent and lending that money to credit card customers who pay anywhere from 12 percent to upwards of 20 percent — on top of the 3 percent to 5 percent that merchants pay the banks whenever those cards are swiped. Nor can banks find a way to profit by paying 1.5 percent on a 10-year CD, such as the one Chase was offering last week, and lending the money for 5.375 percent (plus 1 percent up front) in a 30-year mortgage to a borrower with top credit scores (another offer from Chase at the same time).

Instead, Chase found it necessary to announce that it will begin charging up-front fees of up to 5 percent to customers who transfer balances from other credit cards to Chase cards. The bank blamed “new federal regulations” for the fee, which is higher than any major bank has ever assessed for similar transactions. Those regulations, which were enacted last month separately from the regulatory overhaul, prohibit credit card practices deemed abusive, such as making it impossible for customers to repay high-interest debt as long as lower-rate debt is outstanding, or boosting interest rates on outstanding balances for customers whose payments are up to date.

These now-banned practices are cousins of some of the so-called “predatory lending” that industry critics blame for helping to trigger the implosions in the housing and credit markets. Travis Plunkett, legislative director of the Consumer Federation of America, told The AP, “Tremendous problems could have been avoided had such an agency [like the Consumer Financial Protection Agency] weighed in against some of the abusive practices that Congress acted on only recently,"

Obama’s reform plan still has a long way to go before it becomes law. Republicans, in particular, are skeptical about parts of the plan that give increased power to the Federal Reserve. Even some who oppose the overall plan, however, support the creation of the consumer protection agency.

Banks are going to have to get used to treating all their customers the way their best customers are treated: civilly, honestly and openly. Though bankers may doubt it, I think they will survive the experience.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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