I flew back to Los Angeles this week to touch base with colleagues in CW’s Santa Monica office, and sit on a panel discussion about the financial reform package at Town Hall Los Angeles. It couldn’t have been better-timed. The panel – planned months in advance – was the day before President Obama signed the bill. I joined an SEC regulator, securities lawyer and bank executive to give a consumer perspective on the new law. (Check back soon for the audio.)
Bottom line? The bill is a critical first step toward reversing the deregulatory excesses that culminated in the 2008 financial collapse. However, it’s still not a fundamental change in the way Wall Street operates.
The financial industry spent $1.4 million a day lobbying to block
reform, hired 4 lobbyists for every member of Congress, and their
efforts paid concrete dividends.
As a Town Hall audience member noted, the bill fails to rebuild the walls that used to separate Main Street lending at commercial banks from Wall Street speculation at investment banks. Those walls were torn down in the deregulatory frenzy of the 1990’s, culminating in the repeal of the Glass-Steagall Act. They matter, because the meltdown was due in large part to the fact that financial companies were too big, too interconnected, and with too many risky investments to stay afloat without a taxpayer bailout when the mortgage sector went south. Some key policies that are necessary to truly put an end to "too big to fail" banks – including capital, size and leverage requirements for banks – were ignored, or adressed marginally, by Obama’s reform package.
So a lot of work remains to truly overhaul the deregulatory policies of the 1990s and ensure the country isn’t thrust again into a position where the failure of a few bad actors threatens the entire economy.
However, the bill still does more to strengthen regulation of the financial industry than either financial lobbyists or political pundits ever expected.
The financial meltdown left Americans with 8 million jobs lost, and billions in vanished home equity and retirement savings that many can never expect to recover. The key to countering the most powerful lobby on Capitol Hill was public outrage at Wall Street and the bailout of those firms that led us into the crisis.
At the top of Consumer Watchdog’s list of successes for the bill: It creates a strong new consumer regulator, initiates transparency and accountability in the $600 trillion derivatives market that will finally be regulated after operating in the shadows, and, although it doesn’t go far enough, sets some new limits on speculation by banks. Each of these steps target the abusive lending and risky practices that were root causes of the financial crisis.
My comments outlined the main progressive/consumer victory in the bill: The creation of the Consumer Financial Protection Bureau.
The new consumer bureau could mean a return to basic fairness, simplicity and transparency in lending, in contrast to the anything goes, wild west of lending that helped land us in meltdown.
The bill creates one financial regulator whose only job is to identify unfair, deceptive or abusive lending practices before they can threaten the financial system, our homes and retirement savings. This is a sharp departure from the current consumer protection regime, where responsibility is spread over 7 different regulators, all of which have prudential regulation, not consumer protection, as their top priority. Take the Fed, where the 1st priority is monetary policy, then prudential regulation of the financial institutions it supervises. Consumer protection plays 3rd fiddle. The Fed’s refusal to act for over a decade on abusive mortgage lending – even in the face of a Congressional mandate – was exhibit A of the need for a regulator dedicated solely to consumer protection.
The creation of a strong, largely independent consumer financial protection bureau with broad authority to write rules preventing deceptive and abusive lending is one of the bill’s big wins.
The Bureau has:
An independent director, who will be presidentially appointed, who even before the president signed the bill became the new point of attack for the industry.
An independent budget, up to 12% of the Fed budget, with the possibility for additional Congressional appropriations if necessary.
Is Housed within the Fed – but the Fed has no authority to interfere with rulemaking, appointments, the budget etc.
Rule-writing authority across the lending industry – including credit companies, payday lending, debt collection, commercial banking, credit reporting agencies, mortgage lending (there are a few notable exceptions, including auto dealers and some merchants).
Examination and enforcement authority against the biggest banks, all mortgage lenders, and the largest firms in other financial businesses – payday lending, private student loans, etc.
Examination and enforcement authority over the smallest banks and credit unions stays with their existing prudential regulators.
The Financial Stability Oversight Council has the authority to veto the board’s rules – but only w/a 2/3 vote, Treasury Director concurring, and only if the bureau’s rules threaten the stability of the financial system (no one has been able to come up with a realistic example of a consumer protection rule that could conceivably make the system MORE risky).
And it’s supposed to be up and running in 6-12 months.
Consumers will no longer have to wait for Congress to act to address new abuses
in lending. Some of the direct consumer impacts include:
New mortgage rules: Mortgage lenders can no longer get bonuses for steering borrowers into higher-cost loans; prepayment penalties are banned, as are no-doc mortgages.
Loan contracts must be clear and easy to read.
Consumers have a new right to see their credit scores if they’re denied credit or get charged more.
A new Complaint Hotline will give consumers one place to call with financial complaints.
Still, the CFPB, like most aspects of the bill, leaves most of the details to the
regulators. So how well the bureau does to protect consumers going forward will all depend on who’s running the shop. More on the confirmation battle that’s brewing soon.
Public participation in rulemaking will also be key – it’s ongoing and, because the media spotlight will dim, industry’s unlimited resources give it a decided advantage. A well-functioning Bureau must prioritize public participation, to include funding for consumers to be able to hire experts and participate in the rulemaking process. We’ve seen how critical that kind of participation is to successful regulation in California. California’s insurance reform law, Proposition 103, regulates auto and homeowners insurance. It funds consumer participation in ratemaking – Consumer Watchdog has used that ability to save insurance policyholders $1.7 billion since 2003.