The Obama administration’s plan for a new consumer financial protection agency has quickly become the most controversial element of a broader effort to revamp the nation’s financial laws.
An army of interest groups and Republicans is lining up against the proposal, with most hoping to kill it outright. The administration, allied Democrats on Capitol Hill and consumer advocates, meanwhile, argue that the agency is essential to bolstering consumer protection.
Frank and committee Democrats are now negotiating the details of the proposal, with some sources expecting a new draft of the bill within days. Frank is eyeing a markup hearing by mid-October, but he said on Tuesday that he expects the debate to be lengthy and contentious — especially by the time the full House prepares to vote.
“I’ve told the leadership I want a lot of time on the floor,” he said. “I don’t want anyone feeling shut out.”
Apart from the broader fight over whether the CFPA is a good idea, the debate over the agency is crystallizing along at least four main issues.
States’ vs. federal rights
Business lobbyists and centrist lawmakers are raising questions about the relationship between state and federal law under the proposal. The debate revolves around whether the new federal agency should have the power to pre-empt state action.
The administration proposed that the agency would set a minimum for regulation. Regulators and lawmakers at the state level would then be free to pursue stricter or additional regulations. That has business lobbyists worried and cuts to the heart of a long-running debate about state versus federal rights. The financial industry argues that by merely setting a floor for regulation, the proposal raises the specter of firms complying with a patchwork quilt of state laws. A range of laws would, industry lobbyists argue, increase the burden on firms and make compliance much more expensive. Those costs might then be passed on to consumers in the form of higher fees or less attractive deals.
Many centrist lawmakers back partial or full pre-emption of state laws to avoid a hodgepodge of regulation.
‘Plain vanilla’ products
As part of its effort to bolster consumer protection, the administration wants to encourage simpler terms and contracts for financial products such as home loans. The extraordinary growth in the markets for sub-prime and other loans to riskier borrowers — many of which were made by non-bank lenders — led to a bubble and later a collapse in the housing industry. That, in turn, helped spur the financial crisis.
The administration’s proposal authorizes the CFPA to require “plain vanilla” products alongside other products. The agency would also have the power to define product standards. That has many in the financial industry worried. Financial lobbyists argue that consumers want flexibility and “common-sense” products.
Frank earlier this summer raised questions about whether it was possible or even desirable for the government to require that firms offer “plain vanilla” products.
The administration proposed that the agency have broad rulemaking authority. While that may not drive the most heated opposition to the proposal, rulemaking authority would be at the heart of the new agency’s power. The administration wants the CFPA to have sole rulemaking authority over consumer financial protection statutes — authorities that now reside with many agencies.
As proposed, the administration intends for the agency to “consult” with other financial regulators. There are no strong requirements, however, that the CFPA agree with the other regulators. The industry is concerned that this further separates the government’s consumer-protection powers from the responsibilities to oversee safety and soundness. “We would like to see more input from the safety and soundness agencies,” said Steve Verdier, senior vice president of the Independent Community Bankers of America (ICBA). “We’d like to see some joint rulemaking.”
Supervisory and enforcement authority
The current regulators, worried about losing their turf, have pushed back against the proposal. Consumer watchdog groups and some congressional critics, meanwhile, have lashed out at the regulators for neglecting their responsibilities in the run-up to the crisis.
Business lobbyists, particularly for banks, raise the possibility that examinations and enforcement could remain with the existing regulators even if the new agency has broader rulemaking power. “I think there is a strong possibility to keep the enforcement for the banks within the existing banking agencies,” Verdier said. “That’s probably our highest priority.” Banks are worried about the burdens of additional examination from different regulators.