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U.S. House Passes Financial Reform Legislation

Dennis Cuevas, Consumer Protection Counsel

Dennis Cuevas, Project Director and Chief Counsel, Consumer Protection

By a vote of 223 to 202, the House of Representatives passed "The Wall Street Reform and Consumer Protection Act" (H.R. 4173) on Dec. 11, a bill that provides for some of the most sweeping financial reforms since the 1930s. It includes language enabling state Attorneys General to enforce new federal financial regulations.

The bill marks an initial victory for President Obama to address the abuses that contributed to the current economic crisis and to prevent a recurrence. The legislation is broad and will affect how many conduct business, including financial institutions, both banks and nonbanks; homeowners; borrowers and credit card holders; insurance companies; hedge funds; traders in complex derivatives; and securities rating companies.

The cornerstone of the legislation is the modification of the current federal regulatory and enforcement structure and the creation of a Consumer Financial Protection Agency (CFPA). The CFPA will have jurisdiction over most lenders. Banks and credit unions with assets under $10 billion are exempt from exam and primary enforcement. Also exempt from CFPA oversight are real estate brokers, auto dealers, lawyers, accountants, retailers, and pawnbrokers. Unlike the current structure where lending is regulated by several agencies, the CFPA will be the primary agency to oversee most aspects of consumer lending – mortgages, credit cards, payday loans, and the terms on savings accounts. The independent agency will have rulemaking, enforcement, and examination authority and will be able to prohibit or restrict dangerous financial products and product features. The new agency will also address deceptive marketing practices and have authority to restrict forced arbitration.

In addition to creating a CFPA, the bill creates a Financial Services Oversight Council to look more closely at systemic risk. The Council, comprised of the Treasury secretary, the Federal Reserve chair, and heads of the regulatory agencies, will be charged with closely observing the markets for potential threats to the financial system. It can identify firms that should have more money in their reserves. The government may dismantle financial firms if they are considered a grave risk to the economy, and large firms and hedge funds will pay into a resolution fund to cover the costs of dismantling.

The bill also beefs up investor protection by strengthening the Securities and Exchange Commission’s powers so that it can better regulate the nation’s securities markets. The bill improves disclosures provided to investors about investment products and services. Other provisions restrict mandatory arbitration clauses in brokerage contracts, increase resources for regulatory oversight, and require brokers who give investment advice to act in the best interest of their customers.

With respect to the issue of executive compensation, the bill allows company shareholders to get a nonbinding vote on executive pay, and enables federal regulators to ban risky or inappropriate compensation practices.

Lastly, the bill regulates the over-the-counter derivatives marketplace. All standardized swap transactions between dealers and “major swap participants” must be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone who 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.[1]

State Role and Preemption

State Attorneys General have long identified the predatory and deceptive mortgage practices that led to the economic meltdown. State Attorneys General have brought enforcement actions against mortgage companies, forcing them to reform their sales practices and obtaining billions in consumer restitution.

For years, state Attorneys General have advocated that the federal government not preempt state laws aimed at protecting consumers from frauds and abuses, particularly in the enforcement of state banking and mortgage foreclosure laws.

In November, NAAG submitted a letter to Congress urging members to uphold the role of the states in enforcing consumer protection laws should Congress create a CFPA. “Rather than limiting the states' role in consumer financial protection, as some have advocated," the letter stated, "we believe Congress should encourage an active and effective partnership between the states and federal financial regulatory agencies to the ultimate benefit of all consumers."

Under H.R. 4173, state Attorneys General can enforce the CFPA rules. However, an amendment to the bill rolled back the preemption restrictions contained in the original version of the CFPA. The bill now allows for federal preemption of state consumer laws if the Office of the Comptroller of the Currency deems that a state law "prevents, significantly interferes with, or materially impairs a national bank's ability to do business."

Senate Action

The Senate Banking Committee recently began to consider its own financial reform legislation introduced by its chair Sen. Christopher J. Dodd (D-Conn.). Action is expected early next year.


[1] “House Approves Historic New Rules to Govern America’s Financial System,” House Financial Services Press Release, December 11, 2009.

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