A Strong Consumer Watchdog Remains in the Financial Reform Bill

The financial reform debate continues to unfold in the Senate. As Justin mentioned, you can follow the daily developments before the final votes occurs as reported ably by Tim Fernholz and Brian Beutler.

While Majority Leader Reid wants to move things along, a vote scheduled for this afternoon to end the debate has been pushed back. This will allow more time for a number of outstanding issues to be addressed and allow Senators to get votes on their proposed amendments. These include the Merkley-Levin amendment which would impose a version of the Volcker rule to restrict proprietary trading by firms also operating as banks, the Cantwell-McCain amendment to bring back Glass-Steagall rules to segregate consumer and investment banking services, and the Dorgan amendment to restrict credit default swaps for purely speculative purposes. And there are more. In other words, there are still many policy issues to consider and political hurdles to surmount before this bill becomes a law.

But, for what it’s worth, I believe it will become a law. And, a series of important provisions have already been incorporated into the initial Dodd proposal, which drew heavily on the bill that got through the House last December and was based on proposals by the Obama Administration. Most recently, an amendment passed the Senate proposed by Sen. Carper which allowed for some state-level pre-emption of federal standards. While there were some limits imposed on state attorney generals to bring class action lawsuits against national banks, it was a compromise that provided an additional avenue at the state level for consumer advocates to address abusive practices.

Whatever passes the Senate will be subject to a joint House-Senate conference. This creates additional opportunities to alter the bill language but because of our unique federal system the Senate version is likely to carry the day. This means that the CFPA is likely to be a CFPB (a Consumer Financial Protection Bureau, to be located within the Federal Reserve). Regardless of the ultimate wisdom of this administrative arrangement, it looks like this entity will have a significant level of independence (presidentially-appointed director, budget resources, etc.) and, more importantly, a strong mandate to write rules based on the principles of fairness, simplicity, and transparency. It will have powers to enforce these rules with banks and dictate what kinds of financial products and services can be offered in the market by non-banks firms, such as payday lenders and check cashers.

The creation of this new entity will not just provide needed protections for consumers, but I believe it will change the landscape significantly for the provision of financial services. The transformation from a disclosure regime to a principle-based regulatory regime will be very consequential because it creates a new means for regulators to shut down a range of unfair, deceptive, and abusive financial services that have flourished in recent years in the alternative, nonbank financial sector.

As such, it remains one of the most consequential titles in a very consequential bill.