The Senate this week begins debate on its version of a financial-reform bill. The outcome could affect not only financial institutions and consumers but financial planners and investment advisers.
The debate will focus on the shape of a proposed consumer financial protection agency. Senate Democrats, like their colleagues in the House of Representatives, want a powerful, stand-alone entity that can fill in perceived gaps in consumer protection laws by issuing regulation.
Republicans in the Senate do not want such an agency to be independent but to be accommodated within an existing regulatory body, such as the Federal Reserve.
A failure to reach some kind of agreement could hijack much-needed reform.
Both sides must compromise. Financial reform is too important to be blocked over the structure of an improvement in consumer protection.
The House version of the financial-reform bill would give a protection agency power to oversee not just mortgages, mortgage brokers and mortgage bankers but all credit and debit cards, consumer loans, credit-reporting agencies, and even investment advisory and financial advisory services.
It would have the power to set regulations designed to protect consumers when dealing with most areas of consumer financial services. It would have the power to ban or limit mandatory-arbitration clauses in business-consumer disputes. It would also have the power to levy fines of up to tens of thousands of dollars a day for regulatory breaches.
According to the official summary of the House bill, HR 3126, “the agency's mission is to promote transparency, simplicity, fairness, accountability and access in the market for consumer financial services.”
The agency would require that all disclosures are clear, simple and concise and take a lead role in educating consumers about all credit matters. It would also require credit card companies to provide calculators giving payoff terms under different circumstances (i.e., making only minimum payments or paying off in only a year) and require them to offer “plain-vanilla” credit cards in addition to other, more complex products.
A CFPA would not cover businesses and individuals already subjected to regulation by the Securities and Exchange Commission or the
Commodity Futures Trading Commission to the extent that they engaged in an activity regulated by those agencies. Other professionals who would not be covered under a CFPA include accountants, real estate brokers and agents, lawyers, auto dealers, communications providers, consumer-reporting agencies, and pension plan providers.
Some opponents of the House bill are concerned that the agency would make rules for consumer protection, heedless of the costs versus the benefits. However, the House bill would require the agency to constrain its rulemaking authority in accordance with cost benefit analysis and subject its regulatory decisions to extensive analyses.
The version of the agency preferred by the Democrats would consolidate consumer protection responsibilities now spread among seven federal agencies, including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.
While the Republicans would prefer to strengthen the current regulations, they apparently would accept that
consolidation, but want the agency to be part of an existing agency where it can't become an independent power center that might be captured by consumer advocates mindless of the needs and realities of business.
