House Passes Consumer Protection Bill. Sets Consumer Lending Standards

The House of Representatives passed new legislationrnFriday afternoon which will substantially change the way Wall Street andrnconsumer lenders do business.

By a vote of 223-202 lawmakers passed HR 4173, ThernWall Street Reform and Consumer Protection Act. rnThe tally did not include a single Republican vote.

The 1280rnpage bill will strip most of the Federal Reserve'srnpowers to write consumer-protection laws, creating instead the Consumer Financial Protection Agencyrn(CFPA) a new and independent agency which will have, as its only responsibilityrnprotecting consumers from unfair and abusive financial products and services.  The legislation also establishes a council ofrnregulators charged with identifying financial firms that are, in the parlancernof today, too big to fail.  Thesernsystemically risky firms will be subject to increased oversight, standards, andrnregulation as well as a process for shutting down, without a taxpayer bailout,rnthose that get into trouble.  Critics sayrnthat the bill allows for breaking up even healthy institutions if regulatorsrnfeel they are too large.

The law incorporatesrnportions of an bill passed earlier this year by the house that outlawed many ofrnthe practices that led to the subprime leading debacle and established a simplernstandard for home loans:  institutionsrnare responsible to ensure that borrowers can repay the loans they are sold.

Executive compensation is also subject to controlsrnwritten in the bills which give stockholders the right to vote on executiverncompensation including pay and so-called golden parachutes and requires companiesrnto disclose incentive-based compensation plans.

The billrnwill require dealers and major swap participants to clear swap transactions andrnexchange them on an electronic platform. rnThe bill defines a major swaprnparticipant as anyone that maintains a substantial net position in swaps,rnexclusive of hedging for commercial risk, or whose positions create suchrnsignificant exposure to others that it requires monitoring.

The Securities and Exchange Commission is givenrnincreased power and is authorized to conduct a study of the entire securitiesrnindustry to identify needed reforms to prevent future problems such as thernMadoff ponzi operation. 

Lastly thernbill requires hedge funds to register with the SEC where they will be subjectrnto systemic risk regulation by a financial stability regulator. 

WallrnStreet and banks have fought hard against the House bill and can be expected torncontinue the battle in the Senate.  Majorrnfinancial corporations have complained that the bill, especially the consumer protectionrnagency, establishes merely another level of bureaucracy.  Opponents of the bill won one victory in thernHouse, successfully defeating an amendment which would have allowed bankruptcyrnjudges to “cram down” the balance of a mortgage to reflect the current value ofrnthe collateral.

In arnletter sent last week to the chairperson and ranking member of the HousernCommittee on Rules a group of mortgage associations expressed concern about onernrequirement in the bill.  The letter,rnsigned by the Community Mortgage Banking Project, the National Home BuildersrnAssociation, the Mortgage Bankers Association and four other groups said that “thernlanguage establishing an across-the-board credit risk retention requirementrnwill raise consumer borrowing costs and limit the availability of affordablernmortgage options.”  The signers said thatrnthey supported the concept of establishing accountability requirements forrnlenders but wanted a “more prudent approach…”based on the level of risk with arnclear distinction for safe, sound and simple mortgages,” and asking for anrnexemption from the requirements for commercial and multifamily real estaterntransactions “where the risks are well defined and understood.”

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