Consumer protection units in financial reform: House and Senate bills

One of the main ailments of our financial system is that currently, consumer protection functions are distributed among a hodge podge of federal agencies, none of which has consumer protection as their main function.  As a result, bank and other financial institutions have been able to take easy advantage of consumers.  The President is taking on the fight on behalf of consumers, and is supporting the creation of an independent financial protection agency, and Congress has begun work on financial regulatory reform.

The House has already passed its bill, and the Senate bill has passed the Senate Banking Committee. What is widely known is that the House bill creates an independent agency called the Consumer Financial Protection Agency (CFPA), whereas the Senate bill creates a Bureau of Consumer Financial Protection (BCFP) "housed" within the Federal Reserve but explicitly barring the Feds from exercising any control over it.  Not much more than that has made it into the public lexicon.  I will try to highlight the most important parts and do a comparative analysis of the consumer protection regulatory frameworks of the two bills.

I have read through the sections on the consumer protection units in both bills, and created a comprehensive side-by-side comparison table if you wish to look at it:

But for the purpose of this post, I plan on focusing on a few areas of interest.

Authority: both bills transfer all federal consumer financial protection functions to the new unit from the following entities in nearly identical language:
  • The Federal Reserve
  • Comptroller of Currency
  • Director of the Office of Thrift Supervision
  • Federal Deposit Insurance Commission (FDIC)
  • Federal Trade Commission (FTC)
  • National Credit Union Administration (NCUA)
  • Department of Housing and Urban Development (HUD)
Both bills task the new unit with preventing unfair, abusive or deceptive acts.  Both bills grant the new unit broad powers to create consumer financial protection rules and regulations and to enforce them, through court if necessary.  Both entitle the unit to provide exemptions from its own regulations based on a variety of factors such as asset, volume of business etc.  However, the House bill has clear language enabling the agency to exempt regulated entities from federal consumer law as well.
The Director, by regulation or order, may conditionally or unconditionally exempt any covered person, service provider, or any consumer financial product or service or any class of covered persons, class of service providers, or consumer financial products or services, from any provision of this title, any enumerated consumer law, or from any reg ulation under any such provision or law, [...]
When it comes to depository institutions (i.e. banks and credit unions), both bills focus the new unit on entities with more than $10 billion in assets, leaving current regulators in charge to enforce consumer protection for smaller institutions.  The House bill is stronger here in that for entities with $10 billion in assets or less, the CFPA can act to enforce consumer law if the current agency in charge of regulating them does not act within 120 days of receiving a recommendation from the CFPA.  The Senate bill merely requires a response from the current regulator to the BCFP within 60 days of such recommendation, but does not authorize it to act.  The House bill also authorizes the CFPA to act unilaterally if concerns arise directly from CFPA's consumer complaint system.

The House bill also authorizes its consumer protection unit to remove a current regulator (for an entity with $10 billion in assets or less) from consumer protection functions and assume those functions, but only with the consent of the Secretary of Treasury.

In case of a conflict between two regulatory units (i.e. the newly created consumer protection unit and another regulator) on consumer matters, the case is appealed to a governing panel that is similarly structured in both bills.  In the House bill, the panel includes a representative each from the consumer financial protection unit and the other regulator, as well as a representative from the federal banking agency that heads (or is next in line to head, if the head agency is party to the conflict) the Financial Institutions Examination Council (members: FDIC, NCUA, Federal Reserve, Comptroller of Currency).  The Senate language is almost identical, except it refers to a 'rotating member' (that is not involved in the conflict) from these four entities rather than specifying which one as the third member of the conflict resolution panel.

Oversight/Advisory Panels: This, frankly, is the place where the bills differ the most.  The House bill has an oversight board with advisory duties only and no executive authority.  This panel includes representatives of the banking regulators, HUD, and 5 members appointed by the President.

The Senate bill also convenes a Financial Stability Oversight Council of 9 voting members:
  1. Secretary of Treasury, Chair
  2. Chair, Federal Reserve
  3. Comptroller of Currency
  4. Director of the Bureau itself
  5. Chair, SEC (Securities and Exchange Commission)
  6. Chair, FDIC
  7. Chair, CFTC (Commodities and Futures Trade Commission)
  8. Director of Federal Housing Finance Agency
  9. Independent member appointed by the President
The Senate bill grants this council with the power to set aside any rules or regulations proposed by the BCFP.  The panel may only exercise that authority with two-thirds of the members agreeing, however.  The Council must act within 45 days of a request on these matters (once the regulation has been issued), and a decision to set a regulation aside is subject to judicial review.

Structural Differences: One reason the Senate bill envisions an oversight panel with authority to set aside regulations may be the difference in the two forms of the financial protection units is structure and control.  While both bills begin with a Director in control of the Agency/Bureau, the House bill transitions to a Commission of 5 within two and a half years (no more than 3 members of a single political party), building review of rules into the agency itself.  The Senate bill continues with the Director.  In both cases the Director/Commission members are appointed by the President and confirmed by the Senate, serve 5 year terms, and may be dismissed by the President for cause (inefficiency, negligence or malfeasance) only.

Enforcement Powers: Both bills shower the consumer financial protection unit with ample power to enforce consumer laws and its own regulations, including the power to issue subpoenas, have those subpoenas enforced through court, compelling the presence of witnesses and putting them under oath, power to bring civil action in court, issue cease and desist orders (subject to judicial review), and the power to grant relief and impose civil penalties.  The House bill explicitly bans the CFPA from providing punitive damages, however, and the Senate bill restricts the civil penalties to $1 million/day for knowing violations of the law, to $25,000/day for reckless violation of laws or regulations and $5,000/day for violation of an order.

Both bills also protect employees of regulated entities from retribution for whistle-blowing or for providing any information to the consumer protection agency/bureau, and both bills nullify any mandatory arbitration agreements with respect to this, except those in collective bargaining agreements (union contracts).  If an employee believes a violation has occurred, she or he may bring a case in front of the Secretary of Labor, who has the power to grant relief should she find in the employee's favor, including reinstatement, back pay and compensatory damages.  Under the House bill, the Secretary's decision on the matter is not subject to judicial review.  Under the Senate bill, however, either the employer or the employee may appeal such a decision in court.  Which version you prefer is a matter of perspective - depending on whether you believe a court appeal of the Secretary's decision will more often result in an employer's ability to drag out the process or in an employee's ability to get her day in court should the Secretary be unfair.

Conclusion: At the end of the day, both the House and the Senate bills have their own strengths when it comes to the newly devised consumer protection unit.  I can't say at this moment that one is clearly superior to the other.  In my view, the agreements are more striking than the differences.  Financial regulatory reform is needed badly in this country, and consumer protection must be a centerpiece of that reform.  The frameworks set up in both bills are a great start to strengthening protection for consumers of financial products.

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