Senate OKs Financial Oversight Reform, Consumer Protection

The Senate approved a historic overhaul of regulatory oversight of the financial sector, while creating a new entity to protect consumers from abusive or deceptive practices tied to the most common loan products.

In a 59-39 vote – that included the support of four Republicans – the Senate ended months of debate and fierce lobbying from the banking industry against some key provisions.

But President Obama, Senate Banking Chairman Christopher Dodd – the bill’s primary author – and most Democrats championed the Wall Street reform legislation, with the intent of filling the regulatory loopholes and gaps that contributed to the financial crisis of 2008.

Left out of the legislation is an overhaul of mortgage financing giants Fannie Mae and Freddie Mac, ongoing recipients of billions of dollars in bailout funds. The Obama Administration is working on a separate overhaul proposal for Fannie and Freddie. 

Over the next few weeks, a select few lawmakers will hammer out a consolidation bill, combining the Senate reform measure with the House regulatory overhaul bill that was approved in a partisan vote in December.  House Financial Services Chairman Barney Frank, D-Massachusetts, will play a key role.

Oversight Council &  Consumer Financial Protection Bureau

The key components of the two reform bills are an oversight council of regulators with the power to liquidate a failing financial firm deemed a threat to the economy, and a consumer financial protection agency that would be housed within the Federal Reserve – according to the Senate bill – but retain mostly autonomous authority over the most common financial products, including credit cards, mortgages and payday loans.

The Oversight Council will monitor systemic risk and make recommendations to the Federal Reserve, which would create stricter rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.

Its intent is to end the controversial “too big to fail” policy of the past two years that enabled the distribution of hundreds of billions of dollars in taxpayer bailouts to the largest financial institutions.

The Federal Deposit Insurance Corp. will have the authority to unwind failing financial companies that could threaten U.S. economic stability, with shareholders and unsecured creditors bearing losses.  But creditors of the failing firms will receive bankruptcy-like treatment.

The Consumer Financial Protection Bureau would be able to autonomously write rules to protect consumers from predatory, abusive or deceptive practices by all governing entities – banks and non-banks – offering consumer financial services or products.

Republicans, the banking industry and the U.S. Chamber of Commerce have opposed such a bureau, contending it is an unaccountable new regulator with power over non-financial companies that are not in the business of consumer finance. They also claim it would create politically-motivated policies that would restrict credit availability and standardize loan products reducing options for consumers and small businesses.

The bureau will have the authority to examine and enforce regulations for banks and credit unions with assets of more than $10 billion; all mortgage-related businesses; and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.

Other Reform Provisions

The Wall Street reform legislation also establishs new regulatory oversight of the risky market in financial instruments known as derivatives. Their unchecked trading helped fuel the housing market collapse by betting for or against instruments tied to toxic subprime mortgages.

Various amendments to the reform bill were approved in recent days by the Senate with Republican support, including:

• New rules banning “no documentation” mortgages, and ending lender kickbacks to brokers for originating high-cost loans
• Restrictions on debit card transaction fees charged merchants by the payment networks Visa and MasterCard; reshaping the roles of credit rating agencies;
• The first-ever audit of the Fed’s emergency funding mechanism since the onset of the financial crisis.

For more details, see the latest articles on the various Senate reform bill amendments: 

• Free Credit Scores Now Part of Financial Reform Bill
• Senate Limits, Reshapes Role of Credit Rating Agencies
• Retailers Hail Senate Vote to Restrict Card ‘Swipe Fees’
• Senate Bans ‘No Doc’ Loans, Kickbacks in Mortgage Practices
• Audit of Fed to Unveil Bank Funding Details Since Crisis
• Senate OKs Landmark Powers to Dismantle Failing Firms
• House Reform Bill Creates New Overseers of Credit Industry