The U.S. House of Representatives on Friday afternoon passed its comprehensive financial regulatory reform legislation. The vote for H.R. 4173, called the “Wall Street Reform and Consumer Protection Act of 2009, was fairly close, 223-202, with twenty seven Democratic congressman voting against it along with all of the Republican members.
One of the central planks of the legislation is the creation of the Consumer Financial Protection Agency, or CFPA which will have rulemaking and regulatory authority over consumer financial products and services, including mortgages, home equity lines, credit and debit cards, pay day loans, installment loans, auto loans and leases and other consumer financial products. This plank has been controversial from the start, but it survived an amendment offered during the debate that would have substituted the CFPA for a 12 member council of regulators (similar to the FFIEC) that would have had rulemaking authority over financial products as well as safety and soundness concerns. That amendment failed by 223-208, with 33 Democrats voting for it.
Thus, as passed, the legislation requires that the rulemaking functions for the laws governing these products and services, which have been generally housed in the Federal Reserve, to be moved to this new agency. These laws would be supervised and enforced for nonbank companies by the CFPA, but the federal banking agencies would continue to have examination and enforcement authority over an estimated 98% of all financial institutions, as any bank or credit union that has less than $10 billion in assets are exempt from CFPA enforcement authority. The FTC also would lose rulemaking authority over nonbank institutions for unfair and deceptive practices but would retain back up enforcement authority.
The legislation mandates that the CFPA issue minimum standards for unfair and deceptive practices in the sale and provision of consumer financial products and services, as well as enhanced disclosures. The legislation also mandates that the agency impose certain fair dealing standards. However, there is no longer any requirement that the agency require lenders to offer “plain vanilla” products along with any nonstandard offerings. There also is no restrictions on interest rates, which are mostly governed by state law.
The final legislation also continues to allow national banks and federal savings banks to preempt certain state consumer protection laws, but only the state law "prevents, significantly interferes with, or materially interferes" the business of banking.” This is what is called the “Barnett Bank” standard, which is named after the 1996 Supreme Court case that articulated this standard.
The legislation now faces a somewhat uncertain outlook. Senator Chris Dodd (D-CT), head of the Senate Financial Services Committee, issued a discussion draft of his counterpart legislation in November, but Committee members on both the Democrat and Republican urged him to seek a more bi-partisan bill. Thus, the draft is currently being rewritten by different Committee groups, with Sen. Dodd and Sen. Richard Shelby (R.-AL) taking the lead on the CFPA title. The content of the revised draft, as well as timing, will become clearer in the coming weeks. However, if provisions creating a CFPA survive, its creation will be historic, as it will transfer major consumer responsibilities now divided among several federal agencies into one agency whose sole purpose will be consumer financial protection.
