Obama's financial watchdog gets more teeth

Exactly what will Obama’s financial-industry consumer guardian police? The answer became clearer last week when the administration sent Congress a proposed law detailing its vision for the Consumer Financial Protection Agency.

Obama's plan for establishing the CFPA contains a few surprises regarding its authority. While the Securities and Exchange Commission will continue regulating investment products, the administration says the CFPA will oversee “financial products and services." That’s a pretty broad term, and when the agency proposal was first unveiled in mid-June, most observers took that to mean mortgages and credit cards, the two financial products that have caused the most trouble for consumers and the banking system in the past few years.

But the new 152-page blueprint lays out exactly what the Treasury considers a financial product or service, and it goes well beyond home loans and credit cards.  According to the proposal, the CFPA will oversee any financial activity that comes in connection with extending credit or servicing loans, which includes everything from overdraft protection on bank deposit accounts to stored-value cards.

But most noteworthy, say consumer advocates, is the inclusion of some notoriously overpriced insurance products associated with loans: credit insurance, mortgage payment insurance and title insurance. (Property and casualty insurance are explicitly excluded from the CFPA’s jurisdiction). “There are some serious signs of abuse in the sale of these insurance products, which have low loss ratios, high profit margins and big markups,” says Travis Plunkett, legislative director for the Consumer Federation of America, who testified before the House Financial Services Committee two weeks ago and urged Congress to include loan insurance products under the CFPA.

Credit insurance is sold with a variety of loan products, promising to cover your loan payments if you get laid off or become disabled. Similarly, mortgage payment insurance is designed to cover your home loan payments if you become disabled or die. But premiums for these products are expensive, and you’re typically already covered if you’ve got life or disability insurance.

Unlike credit or mortgage payment insurance, title insurance isn’t optional, and it protects the lender (not you) from any losses associated with ownership issues connected to title on your property. (Note that mortgage payment insurance isn't the same thing as private mortgage insurance, which lenders typically require when a down payment is less than 20%, and which protects lenders in the event of a mortgage default.) Title insurance prices vary widely, and while consumers are free to shop around, most rely on recommendations from real estate agents and lawyers, whose firms frequently get a cut of the premiums. Read this piece from my colleague Stephen Gandel about overpriced title insurance.

The bottom line: Insurance is complicated, and while there are many good reasons to buy insurance — for your health, your life, if you’ve got dependents, or your car — the addition of these insurance products to the CFPA will make it easier to determine which policies you can live without.