Senate Gets Its Own Version of Financial Reform Bill

Senator Chris Dodd (D-Conn.) has introduced the Senate side version of financial reform legislation that would put control of much of the financial services industry, including mortgages and credit cards, under the control of a new, independent Consumer Financial Protection Financial Agency (CFPA).

The CFPA would also oversee the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA).

Dodd’s proposal, which is nearly identical in terms of consumer-protection features in Democratic legislation that’s pending before the House of Representatives, would create a strong, independent Consumer Financial Protection Agency to oversee the sale and use of most financial products, such as mortgages and credit cards.

According to published reports, Dodd hopes his committee, which has 13 Democrats and 10 Republicans, will begin writing a bill early next month. Dodd is Chairman of the Senate Banking Committee.

“This is another extension of ‘don’t let a good crisis go to waste,’” Dan North, chief economist at Euler Hermes, ACI a trade credit insurance firm, said of the 1100-plus page proposal.  “It will meet the same resistance as the House bill because it creates a whole new government agency. I don’t think any [of the existing federal regulators] are going to go away quietly.”

While the House bill and Senate measure are likely to have consumer support due to the protections built into the measures, the proposals face heavy opposition from the FDIC and other current financial regulators as well as from financial services industry groups.

“Enhanced consumer protection should fix what’s broken and not create another layer of federal bureaucracy that consumers will end up paying for,” the American Bankers Association says in its position statement on effective financial regulatory reform. “Improving the existing legal and regulatory structures – particularly by filling the gaps of regulation and supervision of non-bank financial providers – will be more successful, more quickly, than creating a separate consumer regulator.”

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The ABA’s position statement further recommends that any regulatory reform:

• Require regular reports to Congress to ensure that the structure of consumer regulation within agencies is functioning as needed
• Empower the systemic risk regulator to look specifically at consumer issues to identify potentially threatening developments, like the rapid growth of subprime lending, and to require that regulatory agencies to address systemic consumer issues in a timely manner

North added that any new federal agency is likely to be costly and could stifle development of new financial products, an argument that financial services executives have made as well.

Though the Administration would like to see financial reform and supports the House legislation, health care is still tops on the Administration’s docket. Yet continued high unemployment and any further weakness in financial institutions – more than 100 banks have failed so far in 2009 – will likely keep financial reform ahead of other non-health care issues on the legislative agenda, according to North.

But Dodd’s proposal, as currently structured, will have a harder time in the Senate than Barney Frank’s House bill, according to Christie Sciacca, a former FDIC executive and director of LECG, a global expert services firm.

The Senate proposal would have one safety and soundness regulator rather than separate ones as under the current structure, according to Sciacca. The House bill doesn’t include this proposal.

The Senate bill will also receive opposition from the insurance industry because it proposes that insurance firms come under a single regulator rather than being regulated on a statewide basis, which has been the norm since the McCarran-Ferguson Act of 1945, Sciacca said.

Another major difference in the proposals, according to Adam Peterman, federal government affairs director for ACA International, is that the House actually has one piece of legislation that sets up the CFPA and deals with some other issues, another that establishes a systematic risk regulator, a third that involves shareholder rights and a fourth that covers regulation for derivatives.

On the Senate side, all of these issues are rolled into the single proposal to address some of the time lag. “Legislation moves more slowly through the Senate,” Peterman explained.

While ACA International has some concerns over the CFPA – a proposal that is identical in the House and Senate legislation, according to Peterman, the group has yet to develop a position on the entire Senate proposal.