I do not believe that one federal Consumer Financial Protection Agency would have more power than 50 attorneys general and private attorneys enforcing state consumer protection laws against banks. Washington state was only able to stop predatory lending practices against Ameriquest and Household Finance on behalf of state residents because those companies were not federally insured banks. If our Attorney General had been able to sue WAMU on behalf of Washington state citizens or other banks that were swindling their clients, perhaps there would not have been a financial meltdown that almost caused another great depression.

For more information, see these articles from the Huffington Post‘s Stacy Mitchell:

• What Big Banks Fear More Than the CPA
• Five Reasons the Carper Amendment Must Be Defeated

Payday lenders and check cashers fight financial reform legislation in Congress

Payday lenders and check cashers blanketed Capitol Hill last week to challenge the scope of the financial reforms under debate in Congress and combat the industry’s reputation as the pariahs of the financial system.

During the “Hill Blitz” organized by the Financial Service Centers of America, a trade group, about 40 industry executives pushed to exempt check cashing from the purview of a proposed bureau that would oversee consumer financial products. Meanwhile, Democrats launched a new effort to contain the industry by limiting the number of payday loans that consumers can take out.

Reuters economic blogger Felix Salmon notes the inherent ridiculousness of passing “regulatory” legislation that would specifically exempt some of the worst offenders.

Visit msnbc.com for breaking news, world news, and news about the economy

By contrast, debt that is canceled through bankruptcy is not considered income and you do not have to pay taxes on it. If you’re in a position where you can’t pay your creditors, filing bankruptcy can help you as much as or more than independent debt negotiation, and also provides you with a host of legal protections and benefits that you won’t otherwise get.

Note that debt cancellation is not the same thing as interest rate reduction through credit counseling, which does not have any effect on your taxable income.

For more information, read our article Is Debt Negotiation Right For You? For more about canceled debts and taxes, see IRS Publication 4681: Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Investors, including pension funds and mutual funds, often hold the first mortgages. Banks often hold home-equity loans and other second mortgages. Investors reasonably believe that second liens should be reduced before the primary mortgage is modified, but banks balk at that because it would prompt write-offs they don’t want.

Fortunately, investors are getting tired of this foot-dragging:

Some investors, notably the powerhouse group BlackRock, have called for a special bankruptcy process to resolve the standoff. The court would seek to reduce bankrupt borrowers’ total debt to affordable levels, starting with unsecured debt like credit cards, then undersecured debt, like second mortgages, and then, if necessary, the primary mortgage debt.

Giving bankruptcy judges permission to modify the terms of mortgage loans–isn’t that what we’ve been saying for years? Maybe this time the message will get through to Congress and the administration.

In the article,  Elizabeth Warren (a leading consumer advocate and Harvard Law professor) argues that a toothless consumer protection agency would be worse than none at all.  To be effective, says Warren, the new CFPA must include 4 key elements:

Warren isn’t the only one who understands the necessity of a strong, independent consumer protection agency.  In a recent column, economist and NY Times writer Paul Krugman opined that an important factor in the stability of Canada’s economy, as opposed to our volatile one, is the existence of an independent Financial Consumer Agency.

For the sake of America’s future, let’s hope the Senate takes their responsibility seriously and does not create, as Warren put it, “some mouthful of mush that doesn’t get the job done.”

Many of you are probably familiar with option ARMs—loans popular during the housing boom because they gave borrowers the option of paying very low monthly payments (less than the interest) for the first five years.  The Seattle Times reported that between 2004 and 2008, more than $750 billion of option ARMs were originated in the U.S. (58% of which were in California!).  As many as a million of those loans are estimated to reset higher in the next four years. 

Most option ARM borrowers assumed the value of their house would steadily increase, allowing them to refinance or sell before the reset date.  Instead, the values have dropped dramatically, meaning many borrowers will be stuck with the reset loan payments, which may be double the initial amount (or even more in some cases).

What does this mean for the economy at large? It’s not a pretty picture, according to real-estate finance professor Susan Wachter, as reported in the Seattle Times article:

“Owners may surrender properties to the bank rather than make higher payments for homes that have plummeted in value…The option ARMs will drive up the foreclosure supply, undermining the recovery in the housing market…The option ARMs will be part of the reason that the path to recovery will be long and slow.”

For more information, take a look at this New York Times article  published last week.

According to the Times article, the Obama administration’s foreclosure program, which provides a $1,000 incentive to servicers for each loan they modify (plus $1,000 a year for the next three years) is no match for the revenue generated from delinquencies and foreclosures:

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month.  “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

What’s more, the article reports, some mortgage companies (Ocwen, for example) have established their own title companies in order to keep more of the revenue from foreclosures. 

Scary stuff, but kudos to the Times for shedding light on these dark dealings.

(Please don’t let this post stop you from trying to get a modification…many people have successfully lowered their mortgage payments! The loan modification and forbearance section of our website can help you get started.)

House Financial Services Committee Chairman Barney Frank threatened to revive the mortgage “cram- down” bill that stalled in Congress this year, saying lenders aren’t being aggressive enough in modifying troubled home loans.

Cram-downs let federal judges lengthen terms, cut interest rates and reduce mortgage balances of bankrupt homeowners, even if the lender objects. Congress gave the mortgage industry every legislative tool it requested to allow them to more easily modify loans for those facing foreclosure, and the results have been below expectations, Frank said in a statement today.

“People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different,” Frank, a Massachusetts Democrat, said.

Great news, if it happens. Meanwhile, last night’s Daily Show brought us the story of one particular man who might want to take advantage of such an option: