An Evolving Approach to Consumer Financial Protection

House Financial Services Chairman Barney Frank (D-MA) yesterday sent a memo to his Democratic colleagues on the committee outlining areas where he is willing to compromise on the Obama administration’s proposed Consumer Financial Protection Agency (CFPA) and inviting additional Member input. In recent weeks, the Independent Community Bankers Association, the U.S. Chamber of Commerce, and other industry organizations have vehemently opposed the CFPA on the grounds that the new agency’s authority would be too broad and it would separate regulators’ consumer protection functions from safety and soundness responsibilities.

Moderate and Blue Dog Democrats on the committee have been receptive to industry criticisms, especially those of community bankers, who have a strong presence in most members’ congressional districts. It is not surprising that Frank is beginning to compromise on one of the most controversial elements of the administration’s plan, given the Chairman’s determination to enact financial reform before the end of the year.

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Financial Reform Marches Down Field--Fed Protects Its Turf

In the spirit of football season—when trite gridiron analogies are abundant—the Federal Reserve exhibited an aggressive defensive stand this week, asserting its regulatory authority in the face of an administration proposal to curb its independence through the creation of a Consumer Financial Protection Agency (CFPA). This, coupled with the SEC actions yesterday—moving to ban flash orders that enable certain market participants to execute trades faster than everyone else and proposing new rules to crack down on credit rating agencies—suggests that regulators are beefing up their own authority to head off anticipated reform efforts on Capitol Hill. How well the agencies address the perceived regulatory gaps may have a significant impact on a legislative reform bill and could potentially slow down its momentum.

The Fed’s first defensive play came on Tuesday when it announced new regulatory policies that will extend its oversight to certain non-bank institutions, including many of the top originators of subprime loans. As part of the consumer compliance supervision program, the Fed will immediately begin overseeing the activity of non-bank subsidiaries of bank holding companies and foreign banking organizations, specifically by enforcing existing consumer protection laws and investigating all consumer complaints leveled against such entities.

The Fed’s second play – although reportedly still a few weeks from final completion – is the drafting of a proposal that will allow the Fed to reject bank compensation structures that the regulators believe could promote risky financial incentives and practices. According to the Wall Street Journal, the forthcoming proposal would allow the central bank to review and amend not only the compensation polices for executives, but also those for mid-level employees such as traders and loan officers, likely forcing banks to utilize “clawbacks” or mechanisms to reclaim the pay of employees who engage in risky behavior. The Fed is citing its existing regulatory authority over bank safety and soundness to impose its reach into the normal workings of corporate boards and bank executives. 

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It's Baaaaack!

Ample debate time in Washington can bring the good with the bad. As healthcare reform continues to dominate the congressional agenda leading into the fall, lawmakers have been granted an opportunity to finely tune the legislative details of financial reform—but also a window to resurrect previously rejected ideas from the dead.

This week, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced his intention to include the so-called “cramdown” legislation into his chamber's broader financial reform package, injecting new life into a divisive proposal that would allow bankruptcy judges to modify mortgages by extending the term, reducing the interest rate, or writing down the principal amount.

During a HFSC subcommittee hearing yesterday to assess the progress of the Making Home Affordable (MHA) Program, Chairman Frank joined a chorus of lawmakers in expressing disappointment that the Obama administration’s loan modification program has not assisted more distressed homeowners. According to Treasury data, MHA has only modified the loans of 12 percent of eligible delinquent borrowers. Figures from some of the large banks are even lower, with Wells Fargo reporting 11 percent of eligible borrowers and Bank of America coming in at 7 percent. Despite the low percentages, the administration is citing statistics that the program has helped reduce the monthly payments of 350,000 homeowners since March.

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The Circus Comes Back to Town

After a summer of raucous town hall meetings, the dip in President Obama's poll numbers, and the death of Senator Ted Kennedy, members of the House and Senate may well be relieved to return to the routine of the Washington legislative process. With all the turmoil already seen and now expected, there is a flavor of the circus being back in town.

We're actually picturing a three-ring circus— the "main ring" in the middle is where the health care debate is playing out. In the smaller rings we have climate change and financial reform. The action will shift back and forth at various times but all three rings will have their moments of action. While the ultimate fate of climate change legislation is very much in doubt, health care reform and financial reform are better bets to see final or near-final action in the next four months.

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