House Passes Consumer Protection Bill. Sets Lending Standards
The House of Representatives passed new legislation
Friday afternoon which will substantially change the way Wall Street and
consumer lenders do business.
By a vote of 223-202 lawmakers passed HR 4173, The
Wall Street Reform and Consumer Protection Act.
The tally did not include a single Republican vote.
The 1280
page bill will strip most of the Federal Reserve's
powers to write consumer-protection laws, creating instead the Consumer Financial Protection Agency
(CFPA) a new and independent agency which will have, as its only responsibility
protecting consumers from unfair and abusive financial products and services. The legislation also establishes a council of
regulators charged with identifying financial firms that are, in the parlance
of today, too big to fail. These
systemically risky firms will be subject to increased oversight, standards, and
regulation as well as a process for shutting down, without a taxpayer bailout,
those that get into trouble. Critics say
that the bill allows for breaking up even healthy institutions if regulators
feel they are too large.
The law incorporates
portions of an bill passed earlier this year by the house that outlawed many of
the practices that led to the subprime leading debacle and established a simple
standard for home loans: institutions
are responsible to ensure that borrowers can repay the loans they are sold.
Executive compensation is also subject to controls
written in the bills which give stockholders the right to vote on executive
compensation including pay and so-called golden parachutes and requires companies
to disclose incentive-based compensation plans.
The bill
will require dealers and major swap participants to clear swap transactions and
exchange them on an electronic platform.
The bill defines a major swap
participant as anyone that maintains a substantial net position in swaps,
exclusive of hedging for commercial risk, or whose positions create such
significant exposure to others that it requires monitoring.
The Securities and Exchange Commission is given
increased power and is authorized to conduct a study of the entire securities
industry to identify needed reforms to prevent future problems such as the
Madoff ponzi operation.
Lastly the
bill requires hedge funds to register with the SEC where they will be subject
to systemic risk regulation by a financial stability regulator.
Wall
Street and banks have fought hard against the House bill and can be expected to
continue the battle in the Senate. Major
financial corporations have complained that the bill, especially the consumer protection
agency, establishes merely another level of bureaucracy. Opponents of the bill won one victory in the
House, successfully defeating an amendment which would have allowed bankruptcy
judges to "cram down" the balance of a mortgage to reflect the current value of
the collateral.
In a
letter sent last week to the chairperson and ranking member of the House
Committee on Rules a group of mortgage associations expressed concern about one
requirement in the bill. The letter,
signed by the Community Mortgage Banking Project, the National Home Builders
Association, the Mortgage Bankers Association and four other groups said that "the
language establishing an across-the-board credit risk retention requirement
will raise consumer borrowing costs and limit the availability of affordable
mortgage options." The signers said that
they supported the concept of establishing accountability requirements for
lenders but wanted a "more prudent approach..."based on the level of risk with a
clear distinction for safe, sound and simple mortgages," and asking for an
exemption from the requirements for commercial and multifamily real estate
transactions "where the risks are well defined and understood."