Illinois Asset Building Group - Building Financially Strong Families and Communities

The last few months witnessed several developments in the struggle to create a Consumer Financial Protection Agency. To recap, on July 9th H.R. 3126, the Consumer Financial Protection Act of 2009, was introduced in the House of Representatives. Hearings on the bill began shortly thereafter and an intense debate ensued. The arguments continued almost to the end of the year when hundreds of last minute amendments flooded the House floor before the final vote.

A few key amendments were proposed at the last minute that threatened to weaken consumer protections. First, the House passed an amendment that would allow banking regulators to retain the authority to examine banks with under $10 billion in assets and credit unions with under $1.5 billion in assets for consumer practices. Thus, only the biggest banks and financial institutions would be subject to examination by the CFPA, undermining perhaps one of the principle reasons for creating such an agency – to empower a single regulator with the authority to effectively oversee all financial institutions, regardless of type or size, and to ensure adherence to consumer protection laws. The CFPA could, however, remove a prudential regulator from this role for specific institutions if it found exams were inadequate and also retain authority over the consumer complaint process for “all banks and nonbanks,” which means all consumer service providers. This provision also does not limit the CFPA’s authority to promulgate and enforce consumer financial service protections.

Another amendment exempted auto dealers and private student loan providers from the CFPA’s jurisdiction. By exempting these lenders, the banks were again able to circumvent the intent of the bill that all lenders should be subject to one regulator for consumer protection regulations.

The most controversial amendment, however, was that proposed by Rep. Melissa Bean (D-IL). As explained in the last newsletter, this amendment would have ensured that any regulations adopted by the CFPA would serve as a federal regulatory ceiling beyond which states could not enact stricter consumer protections. Consumer advocates correctly pointed out that consumers are often best protected against deception and abuse by state regulation and local law enforcement and rightly spoke out against the amendment.

Since this pre-emption debate threatened to derail the entire proposal, at the last minute, Chairman Barney Frank included language to allow states to issue tougher consumer protection requirements than those contained in the CFPA, but also provided the Office of the Comptroller of the Currency (OCC) the power to veto state standards if the OCC determines that the standards affect bank operations in a “material way.” This compromise generated the votes necessary to pass the bill, but could pose problems in the future since cases will basically be decided on an ad hoc basis rather than judged against a bright and understood line.

The Senate bill, which will be debated shortly, has an entirely different spin on the creation of a CFPA. Specifically, the Senate bill would establish a 5 member board, including four Presidential appointees and the director of the CFPA, to serve as the governing regulatory body. The structure, some argue, will ensure broad oversight, but the council may just as likely create deadlock and thereby delay action.

As discussion of the Senate legislation continues and more proposals are made to eviscerate the whole reason for a consumer protection agency, two provisions are likely to be debated. First, the bill as currently drafted would prohibit federal pre-emption of stronger state consumer protection laws. As demonstrated through the House debate, this fight will be prolonged.

The provision which includes the Community Reinvestment Act (CRA) within the jurisdiction of the CFPA will also be sure to incite contention. Some cite the CRA, which requires banks to lend in low-income communities, as the reason for the subprime mortgage meltdown. Critics claim that CRA’s requirements forced banks to take on risky mortgages. Including CRA compliance within the CFPA’s jurisdiction would, they argue, simply encourage a repeat of the past. Yet, the fact is that CRA’s requirement to lend in lower-income communities also requires such lending to be financially sound. Thus, entrusting CRA compliance to the CFPA will actually ensure that subprime lending does not occur.

In sum, the struggles over financial reform will be heated and it will be important for constituents to urge their legislators to support passage of a strong CFPA bill. This new entity has the potential to significantly remake the regulatory landscape for financial services. It could prove to be a foundation for an entirely new consumer banking system. As a strong enforcer of consumer rights, the CFPA could ensure not only that a future crisis does not occur, but also that even if it were, consumers would be properly protected.