A potentially historic bill passed the House on Friday, which if turned into law, could herald one of the most comprehensive revampings of the U.S. financial regulatory system since the Great Depression. For consumers in particular, it could mean the end of deceptive lending practices and stronger consumer protections for credit cards, mortgages, and other lending products. At its core, the new legislation aims to tighten the banking regulatory system in order to root out the perceived causes of last yearâ€™s credit crisis debacle.
One of the most hotly contested parts of the new bill was the proposal to create an independent new Consumer Financial Protection Agency to regulate consumer lending products, including credits cards, mortgages, and other consumer-oriented financial products. The new consumer protection agency would also be charged with reining in deceptive marketing practices and unfair credit card practices, and with interpreting and enforcing the specifics of the new Credit CARD Act passed by Congress in May of this year.
The Consumer Financial Protection Agency would be an independent agency focused solely on consumer protections. Currently, the existing regulatory bodies have authority over particular kinds of financial institutions. In contrast, the CFPA would be given broad regulatory powers in all matters of concern to consumers.
Most notably, the CFPA would take away all the consumer responsibilities currently assigned to the Federal Reserve, the FDIC, and the Comptroller of Currency. The Federal Reserve has been criticized for not clamping down on deceptive and abusive consumer lending practices, and for essentially having a conflict of interest in handling consumer protections while also being charged with protecting the profitability of the companies it regulates.
“This is a big win for consumers,” said Travis Plunkett, Legislative Director of the Consumer Federation of America in a statement after the bill had been passed. “The Consumer Financial Protection Agency (CFPA) will ensure that credit and payment products do not have predatory or deceptive features that can harm consumers or lock them into unaffordable loans. The CFPA will allow consumers to shop or take out a loan knowing that there is an agency looking out for their best interests and eliminating the tricks and traps that have plagued borrowers for far too long.”
The House bill seeks to follow through on the promise lawmakers made last year, when putting close to a trillion of taxpayer money at risk to bail out large financial institutions to avoid economic collapse in the wake of the credit crisis. The bill also introduced tighter regulations for derivatives, gave lawmakers the powers to break up excessively large financial institutions at risk of becoming too-big-to-fail, and introduced tighter oversight over hedge funds. The bill would also force banks and financial companies to put money into a $150 billion emergency fund, which the government could tap into to break up troubled financial companies before they pose a systemic risk.
The proposed Consumer Financial Protection Agency was based on a 150-page proposal set forward by the Obama Administration in July, and it has been fiercely opposed by the financial community. An amendment from House Republicans seeking to derail the proposal for the CFPA by replacing it with a weaker council to regulate credit cards and mortgages was narrowly voted down.
A similar bill proposing watch dog agency for stronger consumer protections was put forward in the Senate in early November by Senate Banking Committee Chris Dodd, however, debate on that bill is not scheduled to begin until early next year.
With the financial community sure to step up lobbying against an independent consumer protection agency, it remains to be seen if the proposal for a strong independent consumer agency with broad regulatory powers will make it into the final legislation. After the vote, House Republicans appealed to banking lobbyists to intensify efforts to derail the bill. Lobbyists have already spent in excess of $300 million so far in an effort to defeat or water down proposed reforms.