Despite vigorous opposition from banks and the U.S. Chamber of Commerce, the House today approved its landmark financial regulation reform bill that creates a new “oversight council” to monitor “systemic risk” to the economy.
It also creates a Consumer Financial Protection Agency that will have the power to enforce and build upon the credit card reform laws set to take full effect in February.
The House rejected the “cram-down” amendment to the bill, opposed by the financial industry, that would let bankruptcy judges extend repayment periods, reduce interest rates and cut the principal on mortgages to avoid foreclosure.
Even without that provision, the Wall Street Reform and Consumer Protection Act, which passed 223-202, comprises many of the concepts promoted by President Obama and House Democrats. It, in effect, ends the “too big to fail” bailout doctrine of the past 14 months. The Senate is considering its own version of financial oversight reform.
The House bill’s most controversial provision is the formation of the Consumer Financial Protection Agency, or CFPA, which would hold the authority to write rules under existing financial laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act.
The CFPA’s rules would cover all financial providers, including banks, thrifts, credit unions and non-bank financial institutions.
“Consumers will not face different levels of protection because of the provider they choose,” the bill states.
The most notable opposition to the CFPA has come from the U.S. Chamber of Commerce, the world’s largest business federation.
In a study commissioned by the Chamber, it was reported that the CFPA will likely “cause disruptions in consumer credit markets due to extensive legal uncertainty arising from provisions of the proposed Act.”
The American Bankers Association has said that it is “concerned about the bill’s impact on preemption of state and local laws; the vast, unchecked power of the new agency; and the regulatory burden that would be placed on traditional banks that never made a single subprime loan.”
Other historical provisions of the bill creates new roles for existing regulatory agencies, diminishes the historic role of the Federal Reserve and creates a new agency above the Fed, the oversight council to monitor systemic risk.
The House bill allows the Federal Deposit Insurance Corp. to unwind a failing firm so that existing contracts can be dealt with and secured creditors’ claims can be addressed.
A “Systemic Dissolution Fund” will be used to help wind down failing financial institutions, “but not to preserve them.” The Fund will be backed by assessments on financial companies with more than $50 billion in assets and by hedge funds with more than $10 billion in assets.
The bill, reshapes the historic role of the Federal Reserve, would become the subject of Congressional audits for the first time since it was created in 1913.
The Fed, the nation’s primary banking regulatory agency, has been a favorite target of legislators critical of its handling of the financial crisis, and subsequent bailout programs.
The bill significantly restricts the Federal Reserve’s use of “section 13(3) authority” to, in effect, bailout or lend to failing financial institutions.
“Use of this authority will require approval by two-thirds of the members of the Council and the consent of the Treasury Secretary after certification by the President that an emergency exists,” the House bill states. “This authority may not be used to provide assistance to individual companies, and Congress will be able to disapprove further use of the authority.”
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