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. 

Although the first announcement had been long expected—Fed Governor Elizabeth Dukes had earlier testified to the House Financial Services Committee of plans for permanent oversight following a successful joint pilot project that reviewed consumer protection compliance of non-depository institutions engaged in subprime lending—the executive compensation proposal caught many in the financial industry off-guard, going far beyond the expected restrictions on only the highest bank earners.

Next week, the House of Representatives is slated to initiate the drafting process for financial reform legislation, beginning with several hearings related to a systemic risk regulator and the CFPA tentatively scheduled all the way through October. House Financial Services Chairman Barney Frank (D-MA) continues to insist that December is the new October, in reference to his original deadline for completing a reform package; and the deadline may be pushed back even further—potentially 2010—due to this week’s regulator activity.

The timing of the Fed’s moves have sent a clear message to lawmakers that it has no intention of quietly ceding its regulatory powers, especially those related to consumer protection. However, the central bank’s inability to prevent many of the missteps and misdeeds that led to the financial crisis has led to a crisis in confidence on Capitol Hill. Additionally, President Obama, Senate Banking Chairman Christopher Dodd (D-CT), House Financial Services Chairman Frank (D-MA), TARP Congressional Oversight Panel Chairman Elizabeth Warren, and FDIC Chairman Sheila Bair are all on record favoring the CFPA. Despite the strength of the offense, there is still disagreement coming from Republicans and some Democrats. Financial Reform Watch anticipates more "delay of game" setbacks in the coming months.

Below is the full list of HFSC hearings that were announced on Tuesday:


September 23, 9:30 a.m.     Testimony from Treasury Secretary Geithner

September 24, 10 a.m.        Expert’s Perspectives on Systemic Risk and Resolution Issues

September 25, 9 a.m.          Oversight and Audit Issues at the Federal Reserve System

September 30, 10 a.m.        Consumer Financial Protection Agency

September 30, 2 p.m.          Credit Rating Agencies (Capital Markets Subcommittee Hearing)


October 1, 10 a.m.                Financial regulators

October 2, 10 a.m.               Capital Market Issues

October 6, 10 a.m.               Capital Market Issues

October 7, 10 a.m.               Derivatives

October 8, 10 a.m.               Systemic/Prudential Banking Reform Issues

October 9, 10 a.m.              Systemic/Prudential Banking Reform Issues

House Democrats Offer Scaled-back Consumer Financial Protection Agency Proposal

Demonstrating that Congress intends to put its own stamp on financial reform legislation, House Democrats on July 8 introduced their own scaled-back version of the new consumer protection agency proposed by President Obama. Coming on the heels of the president’s release of draft legislation to create a new independent regulator for financial products and services, House Democrats responded quickly on Wednesday by unveiling the Consumer Financial Protection Agency Act of 2009 (HR 3126).

The bill was introduced by House Financial Services Committee Chairman Barney Frank (D-MA). While it retains many of the key provisions outlined within the White House bill—including the transfer of consumer financial regulations to the CFPA in order for the new agency to write and enforce rules on financial products of both banks and non-banks—it is notable for several significant differences from the Obama proposal that may limit the CFPA’s jurisdiction.

In particular, the House bill preserves the current regulatory enforcement structure for the Community Reinvestment Act (CRA), which is overseen by the Office of the Comptroller of the Currency (OCC), the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) in order to ensure that depository institutions are engaging in fair lending practices to low-income communities. Additionally, unlike the President’s bill, which assumes a merger with OTS and OCC to form a new prudential regulator titled the National Bank Supervisory (NBS), H.R. 3126 makes no mention of NBS. Frank’s press release goes on to state that the details of the President’s merger proposal will be considered “at [a] later date.”

Over the next month, the CFPA proposal is all but assured to consume the schedule of the House Financial Services committee, as Chairman Frank has stated his intentions of marking up H.R. 3126 by the end of July. However, serving as a harbinger for the difficulties that may lay ahead on Capitol Hill, a handful of Democrats on the House Energy and Commerce committee, including former Chairman John Dingell (D-MI), expressed serious concerns yesterday regarding the efficacy of stripping the Federal Trade Commission (FTC) of its oversight authority over non-bank financial institutions, such as mortgage brokers and finance companies, and transferring such functions to the CFPA. During a subcommittee hearing entitled "The Proposed Consumer Financial Protection Agency: Implications for Consumers and FTC,” Dingell also highlighted the sensitive committee jurisdictional issues that will arise by narrowing the mission of the FTC, which will ultimately narrow the jurisdiction of the House Energy and Commerce Committee.

Testifying on behalf of the Treasury, Assistant Secretary Michael Barr reiterated to lawmakers that proper oversight requires “one agency for one marketplace with one mission.”

“The lack of federal supervision of non-bank providers is an open invitation to the less responsible actors that seek darker corners to ply their dubious practices,” said Barr in his opening testimony. “These actors are willing to gamble that the FTC and state agencies lack the resources to detect and investigate them. This puts enormous pressure on banks, thrifts, and credit unions to lower their standards to compete—and on their regulators to let them.”

The Draft Consumer Financial Protection Agency Act of 2009

The Treasury Department today released draft legislation outlining a central pillar of the Obama administration’s financial regulatory overhaul: the creation of the Consumer Financial Protection Agency (CFPA), an independent regulator with broad authority over “any financial product or service” used by consumers. Seeking to clarify the administration’s June 17th white paper on financial regulatory reform, the legislation provides lawmakers and industry leaders with the statutory details regarding the proposed CFPA.

According to the draft language, in order to continuously monitor consumer risks, the agency—composed of a five-member board led by a presidentially-appointed director subject to Senate confirmation—would collect information related to loans, products, and services from both banks and non-banks. Additionally, consumer financial regulations that are currently divided among several agencies—the Federal Reserve, FDIC, Office of Comptroller of the Currency, Office of Thrift Supervision, Federal Trade Commission, and National Credit Union Administration—will be consolidated within the CFPA. The legislation would have these regulators transfer functions, rules, and employees to the new CFPA within six to eighteen months following enactment. The agency must research, analyze, and report on consumer awareness and understanding of financial products, related disclosure statements, related risks and benefits, and consumer behavior related to such products. The agency would also collect and track consumer complaints and create a new, integrated disclosure form for mortgage transactions, unless the Department of Housing and Urban Development and the Fed can achieve the same goal prior to the transfer of such responsibilities to the CFPA. There are also provisions related to civil penalties and enforcement authority.

The release of the legislative draft  of the Consumer Financial Protection Agency Act of 2009 was welcomed by House Financial Services Committee Chairman Barney Frank (D-MA), who said creating the agency was one of the committee’s highest priorities. Leaving wiggle room for the inevitable changes he and his colleagues will make, Frank added,

“While the committee will, of course, exercise its own judgment on the specifics and we have already had a thorough hearing on the matter, it is helpful to have the administration’s proposals as well because I believe there is a great deal of common ground between us. And with their text in hand we can now proceed to draft and approve a bill in committee before the August recess.”

Frank’s Senate counterpart, Banking Committee Chairman Chris Dodd (D-CT), also praised the administration and said the CFPA is “key to creating the foundations for a stronger economy.”

The draft legislation reaches into and amends several existing statutes including:

  • Consumer Leasing Act of 1976
  • Electronic Funds Transfer Act
  • Equal Credit Opportunity Act
  • Expedited Funds Availability Act
  • Fair Credit Billing Act
  • Fair and Accurate Credit Transactions Act
  • Federal Deposit Insurance Act
  • Federal Reserve Act
  • Federal Credit Union Act
  • International Banking Act of 1978
  • Fair Debt Collection Practices Act
  • Gramm-Leach-Bliley Act
  • Home Mortgage Disclosure Act
  • Home Ownership and Equity Protection Act of 1994
  • Real Estate Settlement Procedures Act
  • Truth in Lending Act; Right to Financial Privacy Act of 1974
  • Secure and Fair Enforcement for Mortgage Licensing Act of 2008
  • Farm Credit Act
  • Truth in Savings Act 

Consumer Financial Protection Agency Act of 2009 - White House Draft Bill (PDF)