Posted on 24th May 2010 @ 8:42 AM

The major financial reform bill that the Senate passed on May 20 includes enhanced consumer protections — including the creation of a new consumer protection agency. This measure will now go to a House-Senate conference committee, which will resolve differences between the Senate bill and a similar measure the House approved last December.

New Agency to be Created

The Senate bill would establish a Bureau of Consumer Financial Protection to regulate the “offering and provision of consumer financial products or services under the federal consumer financial laws.” While the Senate bill would place the new agency within the Federal Reserve System, its director is to be appointed by the President and confirmed by the Senate. The Federal Reserve Board is barred from controlling the new agency; however, the agency can draw on the Federal Reserve for funding, up to a maximum portion — ultimately twelve percent — of the Fed’s annual earnings.

The House bill, by contrast, would create an independent agency, not within the Federal Reserve.

Authority

The agency would have the authority to enforce the federal consumer financial protection laws uniformly across different categories of financial services providers. The agency is to safeguard consumers from unfair or abusive practices, prevent illegal discrimination, and ensure that consumers receive timely and understandable disclosures. The agency is to carry out these responsibilities by:

• Adopting regulations and guidance. The new bureau would largely take over the financial regulatory agencies’ rule-making authority, including that of the bank regulators. (It would share with the Federal Trade Commission the power to define unfair and deceptive practices.) However, the new agency would have to consult with the OCC, FDIC, National Credit Union Administration, and Federal Reserve Board on whether a proposed action might cause safety-and-soundness or systemic-risk concerns. The Financial Stability Oversight Council, which is created by another part of the bill to deal with large, systemic-risk institutions, would have the authority to bar any bureau action that the Council believed would put the safety of the banking system at risk.
• Enforcing its regulations against most categories of institutions. The new bureau would supervise and examine many nonbank financial services companies — including nonbank subsidiaries of depository institutions. The bureau would also have primary supervisory authority over all types of depository institutions that have total assets of $10 billion or more. Depository institutions with assets of less than $10 billion would be subject to examination and enforcement by their primary prudential regulator — the Fed, FDIC, OCC, or NCUA — as is now the case. The prudential regulators would also have a back-up authority to take enforcement actions against over-$10 billion institutions if the new agency failed to act.
• Punish violations. The bureau would exercise the familiar enforcement authorities now held by the bank and credit union supervisors. It could conduct investigations and issue subpoenas to support its actions. It could conduct regulatory hearings or bring civil actions in court. It could impose civil money penalties in amounts up to $1 million per day, depending on the type and severity of the alleged violation. It would be able to bar persons from employment at financial institutions, refer criminal activity to the Justice Department for prosecution, and report tax law violations to the Internal Revenue Service.

The agency would have the authority to respond to consumer complaints. It could also gather and publish information regarding risks consumers may encounter in the financial services market. It would have the power to draft model forms and disclosures for use by financial firms.

Exceptions

Responding to concerns that their measure might disrupt the operations of small business that are not ordinarily considered to be financial services providers, the Senators created exceptions for some entities from the new agency’s jurisdiction. A small business will not be covered if it:

• Extends credit to consumers only to allow them to buy a nonfinancial product or service from the small business.
• Does not sell the debt to another party (unless the debt is delinquent).
• Qualifies under the size standards of the Small Business Act.

A number of types of business are exempted from the new agency’s jurisdiction. These include accountants and attorneys; real estate brokers; manufactured-home sellers; insurance companies; entities regulated by the Farm Credit Administration, SEC, or CFTC; employment plans; and charities. The House version of the bill would exempt automobile dealers; the Senate version would not. Treatment of the politically powerful automobile dealers may be one of the more difficult issues the conference committee will encounter.

State Laws

The Senate bill would provide that, in general, it does not exempt state laws nor bar the enforcement of state laws that provide a higher degree of protection.

However, for federally chartered banks and thrifts, state law could be preempted if it discriminated against federal institutions, or if the preemption was asserted by the OCC on a case-by-case basis, as authorized under certain prior Supreme Court rulings. However, state laws would not be preempted in cases involving national banks’ and thrifts’ non-bank subsidiaries.

State attorneys general could enforce federal consumer protection laws. This authority would be limited to cases within the boundaries of their own states, and would exclude “class-action like” lawsuits where the attorney general purports to be acting for the benefit of all of the state’s citizens. State banking authorities could enforce federal consumer protection laws, but only against the institutions they regulate.

Miscellaneous Provisions

The Senate bill specifically provides that:

• The Community Reinvestment Act remains the responsibility of the bank regulatory agencies — not the proposed consumer agency.
• Card networks’ interchange transaction fees must be “reasonable and proportional to the actual cost” of providing the service. Card issuers under $10 billion in assets are exempt.
• The new agency may outlaw mandatory arbitration clauses in consumer credit contracts only if it first holds hearings where evidence is presented to justify the change.
• Mortgage originators are barred from receiving yield spread premiums — additional compensation based on the interest rate on the loan.
• Mortgage lenders must document the borrowers’ ability to repay the loan.
• Prepayment penalties are forbidden for certain non-traditional mortgages.
• Persons taking any adverse action bused on consumer credit reports would have to provide the applicant with his or her numerical credit score.
• The Treasury Department should take certain actions to encourage the development of alternatives to payday loans.