InfoBytes, Regulatory Restructuring Report, Issue Nine, October 6, 2009
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Chairman Frank Introduces Revised Regulatory Reform Legislation; House Financial Services Committee Holds Hearings on Legislative Proposals
Chairman Frank Releases and Holds Hearing on Revised Language Creating CFPA. On September 25, House Financial Services Committee Chairman Barney Frank (D-MA) introduced “discussion” draft legislation (the “Draft”) that revises H.R. 3126, the bill previously introduced in the House that would create the proposed Consumer Financial Protection Agency (the “CFPA”). Informed in part by the issues that have arisen during the numerous hearings the Committee has held, the Draft makes a number of key changes from H.R. 3126. Among the changes made in the Draft are the following:
Definitions
• Includes new activities in the definition of a “financial activity” within the jurisdiction of the CFPA, including debt management, debt settlement, modifying the terms of any extension of credit, or foreclosure alternative assistance (as activities of a “financial adviser”), but removes other activities from the same definition, including, tax-planning or tax preparation services, collecting, analyzing, maintaining and providing consumer report information, and financial data processing;
• Specifies that the business of insurance (other than credit, mortgage or title insurance) is not a financial activity;
• Specifies that national securities exchanges, transfer agents, and clearing corporations are considered “persons” regulated by the SEC;
• Adds a new definition of “related person” to include directors, officers, controlling stockholders, shareholders, and joint venturers, among others, who will be included as “covered persons” for purposes of the CFPA; and
• Removes the definitions for “alternative consumer financial product or service,” and “standard consumer financial product or service,” which related to the so-called “plain vanilla” products originally proposed for the CFPA to define.
Creation of the CFPA
• Revises the structure of the CFPA, setting up a single Director as the head, instead of a Board of Directors;
• Establishes the Consumer Financial Protection Oversight Board (“CFPOB”), to be comprised generally of the heads of the federal banking agencies and the chairman of the state banking representatives to the FFIEC, whose role will be advisory only, and will not include any executive authority;
• Creates a new Office of Fair Lending and Equal Opportunity, which will be given power to provide oversight and enforcement of fair lending laws, including ECOA and HMDA, and to coordinate fair lending enforcement with other federal agencies and state regulators; and
• Establishes a new funding mechanism, consisting of fees assessed on “depository institution covered persons” (credit unions or insured depository institutions) and “nondepository covered persons” (any other covered person) based on the size and complexity and the compliance record of the covered person; also includes a capped assessment rate for covered persons with assets of less than $25 billion.
Powers & Authority of the Agency
• Grants the Director the authority to establish an examination program for all covered entities, regardless of charter or corporate form, based generally on the Director’s assessment of the risk presented by the covered person;
• Requires that federal banking agencies coordinate examinations, including with state bank supervisors, and share information and reports regarding an examination for covered persons, and sets forth a procedure to resolve conflicts in “material” supervisory determinations;
• Exempts certain activities and actors from the CFPA regulatory authority, including credit or other financial activities issued directly by a merchant, retailer, or seller of nonfinancial services, qualified retirement or eligible deferred compensation plans and arrangements, accountants, tax preparers, attorneys, licensed real estate brokers and agents, auto dealers, and consumer reporting agencies (except in certain circumstances);
• Requires the registration and supervision of nondepository covered persons, including reporting requirements and examination procedures whose requirements will be imposed on a risk basis;
• Expands the CFPA’s authority to take action to prevent an unfair, deceptive or abusive act or practice to the “offering” of a consumer financial product or service (previously limited to a transaction);
• Generally exempts “service providers,” who are persons who provide a material service to a covered person in connection with the provision of a consumer financial product or service, from applicability;
• Removes a provision that would have required the CFPA to develop regulations that would have established “reasonable disclosures and communications”; and
• Removes the provisions that would have required the CFPA to define and develop “plain vanilla” or “standard” consumer financial products or services.
Other Changes
• Permits the CFPA to engage in joint investigations or requests for information with other agencies, and cites in particular matters relating to fair lending with HUD, the Attorney General, or both;
• Specifies that the FTC retains enforcement authority over the Credit Repair Organizations Act, Section 5 of the FTC Act, and the Telemarketing and Consumer Fraud and Abuse Prevention Act;
• Includes transfers of functions and employees of HUD relating to RESPA and the SAFE Mortgage Licensing Act; and
• Adds the Homeowners Protection Act to the list of consumer laws covered by the legislation.
On September 30, the House Financial Services Committee held a hearing on the Draft. Chairman Frank referred to the draft as merely a starting point, noting in particular that discussions continue regarding the bill’s preemption provisions. Amendments on this issue in particular are a certainty, as at least one Democrat, Rep. Melissa Bean (D-IL), said that she will introduce an amendment at markup to preserve federal preemption. House Republicans voiced concern about the proposal’s preemption provisions and potential increases in the cost of credit, with Rep. Bachus (R-AL) commenting that, although the most recent draft is an improvement, it is mostly tinkering on the edges of what is a fundamentally flawed proposal. The Chairman opened the hearing by stating that banks should not be charged extra for the operation of the new agency, noting that both power and funding will be taken from the Federal Reserve. At the hearing, Chairman Frank stated his intent to mark up the bill the week of October 12.
Witnesses at the hearing included representatives from the NAACP, National Council of La Raza, the Center for Responsible Lending, the Heritage Foundation, and the Service Employees International Union on the first panel, and financial industry representatives on the second panel, including the American Bankers Association, the American Financial Services Association, the U.S. Chamber of Commerce, and the Independent Community Bankers Association. As was the case with the members of the Committee, the industry representatives raised concerns over preemption and repeated concerns relating to conflicts of consumer protection and safety and soundness if the CFPA were created. To see the full text of the witness testimony, please see http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr_092309.shtml.
Treasury Secretary Geithner Testifies In Support of Revised Language. On September 23, Treasury Secretary Timothy Geithner appeared in the House Financial Services Committee to discuss the Administration’s views on financial regulatory reform. Both Secretary Geithner’s testimony and the questioning from the panel focused primarily on two particular aspects of the reform proposal: the CFPA and the designation of Tier 1 financial institutions and the “too big to fail” moral hazard dilemma. As was the case in prior hearings, the Republican members of the Committee were generally against the creation of the CFPA, citing the need for better enforcement of existing regulation rather than creation of new regulation, while the Democratic members generally supported creation. Secretary Geithner reiterated strong support for the creation of the CFPA, stating that consumer protection will not be improved unless and until the structural issue of fragmented consumer protection authority is consolidated into one agency that can write rules, oversee compliance, and enforce violations. When some members questioned why he continues to support this view when the head banking regulators all oppose the idea, he repeatedly stated that the current model has not and does not work and needs to be changed. However, Secretary Geithner has indicated acquiescence to at least one controversial aspect of the reform plan, stating that he supports the revisions Chairman Frank made in the new discussion draft legislation (described above), including the removal of the “plain vanilla” product requirement. This provision had received major criticism, particularly on the Republican side, that such a requirement would significantly stifle consumer choice and market innovation. Instead, Secretary Geithner stated that better disclosure is probably a better path to balancing consumer protection and protecting consumer choice.
Regarding the proposal to identify systemically significant institutions as Tier 1 financial institutions, Secretary Geithner listed that the package of reforms proposed in the legislation, including stronger capital, liquidity, and leverage requirements, a clear resolution authority, and a risk-based oversight approach geared towards the largest, most leveraged and interconnected firms, are critical to avoiding a new financial crisis. However, on several occasions in questioning, Secretary Geithner acknowledged the concern that labeling an entity a Tier 1 institution will “codify” the market perception that the firm is too big to fail. To those concerns, while he did not agree that the legislation would create such a codified perception, he did agree that eliminating such a perception is vital. He did state that there will be no fixed list of Tier 1 companies; rather, such a designation will be “a guarantee of substantially stricter supervision and regulation by the government.” Notably, in response to a question on whether he would guaranty that there would be no more bailouts, Secretary Geithner demurred, stating it would not be appropriate to “lock the doors to the fire station.”
In his opening comments, Rep. Frank reiterated that he intends to markup the various pieces of regulatory reform as separate legislation, but that it is up to the House leadership whether the legislation is considered separately or as one piece of legislation on the floor.
Chairman Frank Report Card on the “Federal Reserve’s Record on Consumer Protection.” On September 23, Chairman Frank released a “report card” assessing the Federal Reserve Board’s use of “the tools provided by Congress to protect consumers from abusive financial industry practices.” The report card lists four categories of consumer protection issues, and compares the response of Congress with the actions taken by the Federal Reserve. As an example, the report lists the passage of the Home Ownership and Equity Protection Act, passed in 1994, which granted authority to the Fed to act on certain mortgage transactions, and lists the timeline of actions taken by the Congress to address the subprime mortgage crisis, including committee action through 2007, and passage of legislation in the House in 2007 and 2009. By comparison, the report card shows that the Fed did not take action on predatory and subprime lending until after the House, with hearings in June 2007, did not issue its first proposal for rules until December 2007, and did not pass the rules until July 2008. The report provides similar timelines for credit card rules, abusive overdraft protections, and consumer protections under unfair and deceptive acts and practices, in each case Fed action following action in the House Financial Services Committee. The report card concludes, “the Federal Reserve’s inattention and inaction on consumer protection is a key reason why Democrats are working to create the Consumer Financial Product Agency” and that consumer protection “has long been overlooked by federal regulators, and their motivation to protect consumers has been driven more by congressional pressure rather than a sense of duty to the protect the American public.” To see the full report card, please see http://www.house.gov/apps/list/press/financialsvcs_dem/pressfrr_092309.shtml.
Credit Rating Agency Legislation and Hearing. On September 30, the House Financial Services Committee heard testimony regarding proposals to reform the credit rating agencies. The hearing included a discussion of the proposed “Enhanced Accountability and Transparency in Credit Rating Agencies Act,” a bill designed to enhance oversight of the nationally recognized statistical rating organizations (“NRSROs”). Among other things, the bill would (i) establish an office in the SEC to administer rules governing the NRSROs; (ii) require the SEC to establish rules for credit rating methodologies; (iii) require that NRSROs establish internal controls, due diligence and implementation of methodologies for determining credit ratings, and adhere to and disclose the controls; and (iv) establish procedures and safeguards to manage conflicts of interests (including a mandatory “look-back review” after the issuance of a rating). The full text of the witness testimony is available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/pressCM_093009.shtml.